Question

A new raw material is available that will decrease the variable costs per unit by 20% (or $2.80). However, to process the new raw material, fixed operating costs will increase by $90,000. Management feels that one-half of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 5% increase in the number of units sold.

Required:
a. Prepare a projected CVP income statement for 2020, assuming the changes have not been made.
b. Prepare a projected CVP Statement 2020, assuming that changes are made as described.

Answer 1

Missing words "Carey Company had sales in 2016 of $1,586,000 on 61,000 units. Variable costs totaled $854,000, and fixed costs totaled $450,000"

a. Particulars Total Amount($) Per Unit in ($)

Sales 1,586,000 26

Less: Variable cost 854,000 14

Contribution Margin 732,000 12

Less: Fixed cost 450,000 -

Profit 282,000

b. Sales = 61000 + 5% = 61000 + 3050 = 64050 units

Sales price = $26 - ($2.8/2) $1.4 = $24.6

Variable price = $14 - $2.8 = $11.2

Fixed cost = 450000 + 90000 = 540000

Particulars Total Amount($) Per Unit in ($)

Sales 1,575,630 24.6

Less: Variable cost 717,360 11.2

Contribution Margin 858,270 13.4

Less: Fixed cost 540,000 -

Profit 318,270

With this new plan, the profit increases by $26,270 ($318,270 - $282,000)