Question-5

Spring Manufacturing sold 610,000 units of its product for $98 per unit in 2019. Variable cost per unit is $50, and total fixed costs are $1,870,000.

Required:

1. Calculate (a) contribution margin and (b) operating income.

2. Springs current manufacturing process is labor intensive. Jim Gate, Springs production

manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to $6,770,000. The variable costs are expected to decrease to $35 per unit. Spring expects to maintain the same sales volume and selling price next year. How would acceptance of Gates proposal affect your answers to (a) and (b) in requirement 1?

3. Should Spring accept Gates proposal? Explain.