Naylor Company currently produces and sells 6,400 units annually of a product that has a variable cost of $18 per unit and annual fixed costs of $161,400. The company currently earns a $69,000 annual profit. Assume that Naylor has the opportunity to invest in new labor saving production equipment that will enable the company to reduce variable costs to $16 per unit. The investment would cause fixed costs to increase by $9,000 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 Naylor invests in the new production equipment. Recommend whether Naylor should invest in the new equipment.
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