Bean Product manufactures and sells products made of soya beans. One of its main businesses is supplying packaged tofu (bean curds) to supermarket chains in Hong Kong. The sales and cost data of packaged tofu are as follows:

Unit selling price ---- $20

Unit variable cost ---- $10

Total fixed cost ---- $200,000

Breakeven sales (20,000 units) ---- $400,000

Average monthly sales ---- 30,000 units

Bean Products raw material supplier has just announced a price increase in soya beans due to severe supply shortage. The higher cost is expected to increase variable cost of packaged tofu by $3 per unit.

The management of Bean Product is considering the following two independent options:

(1) Increase unit selling price by $3 and sales volume is expected to decrease by 15%.

(2) Purchase a new machine to semi-automate the production process. This will reduce the existing variable cost by 15%, increase the fixed cost by 30% and increase both sales volume and unit selling price by 5%.

QUESTIONS:

(a) Prepare an income statement, showing the contribution margin and the net profit, for each option above. (18 marks)

(b) Based on your answer to (a) above, advise management which option is a better choice. Briefly explain your answer. (5 marks)