Question

Booth Company had sales in 2020 of $1,715,000 on 68,600 units. Variable costs totaled $1,029,000 and fixed costs totaled $536,000.

A new raw material is available that will decrease the variable costs per unit by 20% (or $3.00). However, to process the new raw material, fixed operating costs will increase by $113,000. Management feels that two-thirds 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 4% increase in the number of units sold.

Prepare a projected CVP income statement for 2020 assuming the changes have not been made.

Booth Company CVP Income Statement                                                                       For the Year Ended December 31, 2020For the Month Ended December 31, 2020December 31, 2020
Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs		$
Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs
Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs
AddLess:                                                                       Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs
Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs		$

  

  

Prepare a projected CVP income statement for 2020 assuming that changes are made as described.

Booth Company CVP Income Statement                                                                       For the Year Ended December 31, 2020For the Month Ended December 31, 2020December 31, 2020
Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs		$
Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs
Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs
AddLess:                                                                       Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs
Administrative ExpensesContribution MarginCost of Goods SoldFixed CostsGross ProfitNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs		$

Answer 1

Answer

• Working

A	Current sales price	$25
B	Current variable cost per unit	$15
C	Decrease in Variable cost	$3
D = B-C	New Variable cost per unit	$12
E = C x 2/3	Decrease in Sale price per unit	$2
F = A-E	New Sale price per unit	$23
G	Current sales	68600
H = 4%	Increase in sales units	2744
I = G+H	New no of units sold	71344

• Requirement 1

Booth Company
CVP Income Statement
for the year ended Dec 31, 2020
Sales	$1,715,000
Variable cost	$1,029,000
Contribution margin	$686,000
Less: Fixed Cost	$536,000
Net Income (loss)	$150,000

• Requirement 2

Booth Company
CVP Income Statement
for the year ended Dec 31, 2020
Sales	$1,640,912	=71344*23
Variable cost	$856,128	=71344*12
Contribution margin	$784,784
Less: Fixed Cost	$649,000	=536000+113000
Net Income (loss)	$135,784