Reference no: EM132564634

Larz Company produces a single product. It sold 25,000 units last year with the following results:

Sales                                   P625,000

Variable costs                       P375,000

Fixed costs                            150,000

                                            525,000

Net income before taxes            P100,000

Income taxes                               40,000

Net income                                  P 60,000

In an attempt to improve its product in the coming year, Larz is considering replacing a component part in its product that has a cost of P2.50 with a new and better part costing P4.50 per unit. A new machine will also be needed to increase plant capacity. The machine would cost P18,000 with a useful life of 6 years and no salvage value. The company uses straight-line depreciation on all plant assets.

Question 1: If Larz wishes to maintain the same contribution margin ratio after implementing the changes, what selling price per unit of product must it charge next year to cover the increased material costs?

A. P27.00 C. P32.50

B. P25.00 D. P28.33