(Pro forma income) You have been asked to determine whether the pur¬ chase of a new piece of production machinery can be cost justified for your company. The machine will increase fixed overhead by $350,000 per year but reduce variable expenses per unit by 35 percent. Budgeted 2006 sales of the company’s products are 120,000 units at an average selling price of $25. Variable expenses are currently 75 percent of sales, and fixed costs total $400,000 per year.

a. Prepare an income statement assuming that the new machine is not pur¬ chased.

b. Prepare an income statement assuming that the new machine is pur¬ chased.

C. Should the machine be acquired?

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