Carey Company had sales in 2016 of $1,560,000 on 60,000 units. Variable costs to
ID: 2446211 • Letter: C
Question
Carey Company had sales in 2016 of $1,560,000 on 60,000 units. Variable costs totaled $900,000, and fixed costs totaled $500,000. A new raw material is available that will decrease the variable costs per unit by 20% (or $3). However, to process the new raw material, fixed operating costs will increase by $100,000. 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. (a) Prepare a projected CVP income statement for 2017, assuming the changes have not been made, and (b) assuming that changes are made as described.
Explanation / Answer
(a) Prepare a projected CVP income statement for 2017, assuming the changes have not been made,
(b) Assuming that changes are made as described.
Revised Variable cost per Unit = 900000/60000 - 3 = $ 12
Revised Fixed Overhead = 500000 + 100000 = 600000
Revised Sale Price per unit = 1560000/60000 - 1/2*3 = 24.50
Revised Sale Quantity = 60000*(1+5%) = 63000
Income Statement Sales 1560000 Less : Variable Cost 900000 Contribution Margin 660000 Less: Fixed Cost 500000 Net Operating Income 160000