Question

Question 4 Waterway Company had sales in 2019 of $1,806,000 on 64,500 units. Variable costs totaled $1,032,000, and fixed costs totaled $508,000. A new raw material is available that will decrease the variable costs per unit by 20% (or $3.20). However, to process the new raw material, fixed operating costs will increase by $107,000. 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 2020, assuming the changes have not been made. WATERWAY COMPANY CVP Income Statement For the Year Ended December 31, 2020 Total Per Unit Sales 1,806,000 Variable Costs Contribution Margin Fixed Costs Net Income/(Loss)

Answer 1

Answer

(a) Projected CVP income statement for 2020 ,assuming the changes have not been made

                                                                 WATERWAY COMPANY

                                                                 CVP Income Statement

                                                       For the Year Ended December 31, 2020

Particulars                                                           Total($)            Per Unit($)

Sales                                                                  1806000                 28

Variable costs                                                    1032000                16

Contribution margin                                              774000                12

Fixed costs                                                           508000

Net Income/(loss)                                                 266000

(b) Projected CVP Income statement for 2020, assuming that changes are made as described

                                                                   WATERWAY COMPANY

                                                                 CVP Income Statement

                                                       For the Year Ended December 31, 2020

Particulars                                                           Total($)            Per Unit($)

Sales                                                                  1787940                26.4

Variable costs                                                      866880                12.8

Contribution margin                                              921060               13.6

Fixed costs                                                           615000

Net Income/(loss)                                                 306060

Notes:

Revised variable cost per unit = $16-$3.2 = $12.8

No of units = 64500*105% = 67725

Reduction in selling price per unit = $3.2/2 = $1.6

New selling price per unit = $28 - $1.6 = $26.4

Total sales = 67725 units * $26.4 = $1787940

Fixed costs = $508000 + $107000 = $615000.