Alyssa Co. is planning to purchase a new piece of production equipment. The equipment will increase fixed overhead by $700,000 per year in depreciation but reduce variable expenses per unit by 20 percent. Budgeted 2011 sales of the company’s products are 240,000 units at an average selling price of $25. Variable expenses are currently 65 percent of sales, and fixed costs total $1,400,000 per year.
a. Prepare an income statement assuming that the new equipment is not purchased.
b. What is the current variable cost per unit? What will be the new variable cost per unit if the equipment is purchased?
c. Prepare an income statement assuming that the new equipment is purchased.
d. Should the equipment be acquired?