Cobb Company currently produces and sells 9,000 units annually of a product that has a variable cost of $20 per unit and annual fixed costs of $195,000. The company currently earns an $228,000 annual profit. Assume that Cobb has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $16 per unit. The investment would cause fixed costs to increase by $25,000 because of additional depreciation cost.
Required
a. Use the equation method to determine the sales price per unit under existing conditions (current equipment is used).
b. Prepare a contribution margin income statement, assuming that Cobb invests in the new production equipment. Recommend whether Cobb should invest in the new equipment.