Production cost and price data for Kempinski Company are as follows:

The company's sales for the year just ended totalled 260,000 units. However, a strike at a major supplier has caused a shortage in raw materials and, as a result, the current year's sales will reach only 240,000 units. Top management are planning to reduce fixed costs this year by $60,000 compared with last year.
Management are also thinking of either increasing the selling price or reducing the variable costs, or both, in order to earn a target operating income that will be the same dollar amount as last year's. The company has already sold 60,000 units this year at $28 per unit, with the variable costs remaining unchanged from last year
Instructions
(a) Calculate the contribution margin per unit that is required on the remaining 180,000 units in order to reach the target operating income.
(b) The company president is considering a significant change in the manufacturing process for next year. This change would increase the capacity to 450,000 units. The change would increase fixed factory overhead to $3.0 million, while reducing the variable manufacturing cost per unit to $5. All other costs and revenues would remain unchanged. Draft a brief memo to the president explaining the potential benefits and risks of a move to this cost structure. Support your explanation with an analysis of the numbers.

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Maximum capacity per year Variable manufacturing costs Fixed factory overhead costs Variable selling and administrative costs Fixed selling and administrative costs Current sales price 300,000 units $18/unit $500,000/year $6/unit $200,000/year $28/unit