Question

Carey Company had sales in 2019 of $1,703,700 on 63,100 units. Variable costs totaled $883,400, and fixed costs totaled $549,000. 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 income statement for 2020, assuming that changes are made as described.

Answer 1

Answer:

a. CVP income statement for 2020 [ assuming no changes]

Sales                                                      $1,703,700

Less Variable Cost                                ($883,400)

Contribution                                            $820,300

Less Fixed Costs                                   ($549,000)

Net Income/ (Loss)                                  $271,300

a. CVP income statement for 2020 [ assuming changes are made]

Sales (($1,703,700/ 63,100 - $1.40 ) × (63,100 + 5%))                       $1,696,128

Less Variable Cost (($883,400/63,100 - $2.80) × (63,100 + 5%))    ($742,056)

Contribution                                                                                          $954,072

Less Fixed Costs ($549,000 +$90,000)                                          ($639,000)

Net Income/ (Loss)                                                                                $315,072

Explanation:

Adjusting the CVP income statement requires you to first find the current unit selling prices and variable costs. This is done by dividing the Total Sales and Total Variable Costs with the number of units currently sold.

Once you have these apply the changes respectively and remember to increase the number of units as well for the final answer in the line items. Follow carefully the calculations i have done.