46. HGML Co. produces one product using a single machine that has a capacity of 100,000 units

per year. Last year, the company produced and sold 80,000 units. It is considering replacing the

machine with a new, automated machine that would eliminate all direct labour costs, but would

require a higher grade of direct materials and a licensing fee of $1 per unit. The production

costs using the new versus the old machine at two production activity levels are as follows:

80,000 units 100,000 units

Old Machine New Machine Old Machine New Machine

Direct materials $120,000 $152,000 $150,000 $190,000

Direct labour 80,000 - 100,000 -

Amortization 50,000 70,000 50,000 70,000

Licensing fee - 80,000 - 100,000

Other overhead 350,000 280,000 380,000 310,000

Total $600,000 $582,000 $680,000 $670,000

The selling price of the product is $10 per unit. All selling and administration costs are fixed at

$300,000 per year, which would not change if the new machine is acquired. The company has a

40% tax rate and an after-tax cost of capital of 10%. The new machine would have a life of three

years, which is the same as the remaining useful life of the old machine. Neither machine would

have a material disposal value at the end of three years. Other data pertaining to the two

machines are as follows:

Old Machine New Machine

Original capital cost $250,000 $210,000

Current market value $120,000 $210,000

Current book value $180,000

Undepreciated capital cost $195,500

Capital cost allowance rate 30% ` 30%

Assuming the company continues to use the old machine, what is the contribution

margin per unit of the product?

a) $7.50

b) $4.00

c) $6.925

d) $3.70

e) $6.00