Prepare a CVP income statement before and after changes in b

Prepare a CVP income statement before and after changes in business environment.

AP 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.

Instructions Prepare a projected CVP income statement for 2017 (a) assuming the changes have not been made, and (b) assuming that changes are made as described.

Solution

Answer a CVP statement assuming the changes have not been made Total Per Unit Sales (60000 units) $1,560,000 $26 Variable Expenses $900,000 $15 Contribution Margin $660,000 $11 Fixed Expenses $500,000 Net Income $160,000 Answer b CVP statement assuming the changes are made as described Total Per Unit Sales (63000 units) $1,543,500 $24.50 Variable Expenses $756,000 $12 Contribution Margin $787,500 $12.50 Fixed Expenses $600,000 Net Income $187,500