Question
Peterson Company produces a single product, Item 0916. Last year (2021) Peterson sold 40,000 units of Item 0916. The total revenue for those 40,000 units
Peterson Company produces a single product, Item 0916. Last year (2021) Peterson sold 40,000 units of Item 0916. The total revenue for those 40,000 units was $1.5 million. Peterson's manufacturing facility is old and their equipment is outdated and their processes do not take advantage of automation and as a result their manufacturing is very labor intense. Peterson's direct labor cost per unit for Item 0916 is $13.50. The remaining variable costs per unit are $5.00 and $4.00 per unit for direct materials and other variable costs, respectively. Currently, Fixed costs per year total $480,000. Next year (2022), it is estimated that due to wage increases for all employees, the direct labor cost will increase by $3.00 per unit of Item 0916. The following year (2023), Peterson plans to recondition their equipment and modernize the physical plant. These changes will slash the original (2021) variable cost by 40% and will increase fixed cost by 90%.
Compute the contribution margin and contribution margin ratio per unit of Item 0916.
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