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Kent Manufacturing produces a product that sells for $70.00 and has variable costs of $36.00 per unit. Fixed costs are $408,000. Kent can buy a new production machine that will increase fixed costs by $28,800 per year, but will decrease variable costs by $5.00 per unit. Compute the contribution margin per unit if the machine is purchased.

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Answer:

If the machine is purchased, the contribution margin per unit will be $39.00

Explanation:

Contribution margin per unit is the amount that each additional unit sold contributes towards a company’s fixed costs and profit and calculated by following formula:

Contribution Margin per Unit = Sales Price – Variable Cost per Unit

If the machine is purchased, variable costs will decrease by $5.00 per unit

Variable Cost per Unit = $36.00 - $5.00 = $31.00

Contribution Margin per Unit = $70.00 - $31.00 = $39.00

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