Question

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.

Answer 1

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