Question 2. (20 points total) The management team of Transcendental Company has hired you to help them with some accounting projections. They have put together part of a cost volume profit (CVP) Income Statement for the current year. You will need to complete the statement.

They also provide the following information:

They are planning to sell the same number of units of product next year They have selling and administrative salaries and recurring costs of $75,000 per year The leases and salaries related to production costs (COGS) are $250,000 per year They pay selling and related shipping costs of $3 per unit

They would like you to project their situation to reflect two changes:

1) For the coming year, no changes are expected in revenues and costs, except that a new wage contract will increase variable costs in COGS by $6 per unit.

2) In response to the higher wage costs that are projected, management is considering installing automated manufacturing equipment next year. This equipment will increase annual fixed costs in COGS by $150,000 but will decrease variable manufacturing costs by $10 per unit. (This change should be combined with the higher wages in part 1 above.)

Required:

(a) (10 points) Complete the CVP Income Statement to reflect the wage changes for next year and to reflect the investment in equipment. Use the blank columns in the table below.

(b) (5 points) Determine the break-even sales (in units) for the past year and for each of the two other scenarios.

(c) (5 points) Do you think that the investment in the equipment is a good idea? Refer to the information in the statement that you have prepared. What are the pros and cons of the option of investing in additional equipment to lower variable costs in COGS? Be specific!

Contribution Margin Income Statement Based on units sold of: 35,000 35,000 35,000 Next Year, with Next Year, with [higher labor cost higher labor cost and invest in Past Year as only change new equipment 875,000 Sales Variable costs: COGS Operating expense i total variable costs Contribution Margin IFixed costs: COGS 420,000 total fixed costs Operating income Break Even Point