Question

This year Burchard Company sold 29,000 units of its only product for $19.20 per unit. Manufacturing and selling the product required $114,000 of fixed manufacturing costs and $174,000 of fixed selling and administrative costs. Its per unit variable costs follow.

Material		$	3.40
Direct labor (paid on the basis of completed units)			2.40
Variable overhead costs			0.34
Variable selling and administrative costs			0.14

Next year the company will use new material, which will reduce material costs by 70% and direct labor costs by 30% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 34,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 30%. This plan will decrease unit sales volume by 15%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (30% rate), and net income.

BURCHARD CO.
Forecasted Contribution Margin Income Statement
	Plan 1	Plan 2
Number of units:	29,000	24,650

Answer 1

Forecast Contribution Margin Income Statement:

	Plan 1	Plan 2
Number of Units	29,000	24,650
Selling price per Unit	19.20	24.96
Sales	556,800	615,264
Less: Costs
Material	29,580	25,143
Direct labor	48,720	41,412
Variable overhead costs	9,860	8,381
Variable Selling and Administrative Overhead	4,060	3,451
Total Variable Costs	92,220	78,387
Contribution Margin	464,580	536,877	1,001,457
Total Fixed costs			288,000
Income before taxes			713,457
Less: income tax @30%			214,037
Net income			$499,420

Plan 2 is better because it produces higher contribution Margin than Plan 1.

answered by: anonymous