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Question - Gibson Company currently produces and sells 7,000 units annually of a product that has a variable cost of $6 per unit and annual fixed costs of $287,000. The company currently earns a $77,000 annual profit. Assume that Gibson has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $4 per unit. The investment would cause fixed costs to increase by $10,200 because of additional depreciation cost.
Required -
a. Use the equation method to determine the sales price per unit under existing conditions (current equipment is used).
b. Prepare a contribution margin income statement, assuming that Gibson invests in the new production equipment.
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