Gaber Company currently produces and sells 20,000 units of a telephone per year that has a variable cost of $8 per unit and a fixed cost of $420,000. The company currently earns a $180,000 annual profit. Assume that Gaber has the opportunity to invest in a new machine that will enable the company to reduce variable costs to $7 per unit. The investment would cause fixed costs to increase by $10,000.

a. Use the equation method to determine the sales price per unit under existing conditions (current machine is used).
b. Prepare a contribution margin income statement assuming Gaber invests in the new technology. Recommend whether Gaber should invest in the new technology.

  • CreatedFebruary 07, 2014
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