Belmont Company currently produces and sells 7,000 units annually of a product that has a variable cost of $19 per unit and annual fixed costs of $175,000. The company currently earns a $84,000 annual profit. Assume that Belmont has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $15 per unit. The investment would cause fixed costs to increase by $14,000 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-1. Prepare a contribution margin income statement, assuming that Belmont invests in the new production equipment.
b-2. Recommend whether Belmont should invest in the new equipment.
b-2. Should invest in the new equipment Should not invest in the new equipment.