Arnold Company currently produces and sells 10,000 units of a telephone per year that has a variable cost of $10 per unit and a fixed cost of $500,000. The company currently earns a $200,000 annual profit. Assume that Arnold has the opportunity to invest in a new machine that will enable the company to reduce variable costs to $8 per unit. The investment would cause fixed costs to increase by $50,000.
Required
a. Use the equation method to determine the sales price per unit under existing conditions (current machine is used).
b. Prepare a contribution margin income statement assuming Arnold invests in the new technology.
Recommend whether Arnold should invest in the new technology.