Question

Burchard Company sold 45,000 units of its only product for $18.00 per unit this year. Manufacturing and selling the product required $320,000 of fixed costs. Its per unit variable costs are as follows: Direct materials $5.00, direct labor $4.00, variable overhead costs $0.50, and variable selling and administrative costs $0.30. For the next year, management will use a new material, which will reduce direct materials costs to $1.50 per unit and reduce direct labor costs to $2.80 per unit. Sales, total fixed costs, variable overhead costs per unit, and variable selling and administrative costs per unit will not change. Management is also considering raising its selling price to $23.40 per unit, which would decrease unit sales volume to 38,250 units. Prepare a contribution margin income statement for next year with two columns showing the expected results of (a) using the new material and (b) using the new material and increasing the selling price.

Answer 1

The contribution margin income statements for the next year show a net income of $-95,000 when using new material and a net income of $-125,675 when using new material and increasing the selling price.

Step-by-step explanation:

To prepare a contribution margin income statement for the next year for Burchard Company, we must calculate the expected results under two scenarios: (a) using the new material and (b) using the new material and increasing the selling price.

Under scenario (a), the per unit variable costs drop to Direct materials $1.50 and Direct labor $2.80, maintaining Variable overhead costs at $0.50 and Variable selling/administrative costs at $0.30. The contribution margin per unit is therefore $18.00 - ($1.50 + $2.80 + $0.50 + $0.30) = $12.90. Total variable costs are $12.90 x 45,000 units = $580,500. Fixed costs remain the same at $320,000. Therefore, the total contribution margin is $225,000 and the net income is $225,000 - $320,000 = $-95,000.

Under scenario (b), the selling price per unit increases to $23.40 and unit sales volume decreases to 38,250. The new contribution margin per unit is $23.40 - ($1.50 + $2.80 + $0.50 + $0.30) = $18.30. Total variable costs are $18.30 x 38,250 units = $700,175. Fixed costs remain the same, totaling the contribution margin at $194,325 and the net income at $194,325 - $320,000 = $-125,675.