Question

Vaughn Company had sales in 2019 of $1,679,400 on 62,200 units. Variable costs totaled $870,800, and fixed costs totaled $547,000. A new raw material is available that will decrease the variable costs per unit by 20% (or $2.80). However, to process the new raw material, fixed operating costs will increase by $97,000. 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. VAUGHN COMPANY CVP Income Statement Total Per Unit (b) Prepare a projected CVP income statement for 2020, assuming that changes are made as described. (Round per unit cost to 2 decimal places, e.g. 5.25 and all other answers to O decimal places, e.g. 1,225.) VAUGHN COMPANY CVP Income Statement Total Per Unit $

Answer 1

Answer:

(a)

VAUGHN COMPANY

CVP Income Statement

	Total	Per unit
Sales	$1,679,400	$27
Less: Variable Cost	$(870,800)	$(14)
Contribution	$808,600	$13
Less : Fixed Cost	$547,000
Net Operating Income	$261,600

(b)

VAUGHN COMPANY

CVP INCOME STATEMENT

	Total	Per unit
Sales	$1,671,936	$25.6
Less: Variable Cost	$(731,472)	$(11.2)
Contribution	$940,464	$14.4
Less: Fixed Cost	$(644,000)
Net Operating Income	$296,464

Working Note :

Increase in sales = $62,200 + 5% = 65,310 units

New variable Cost = $14 * 80% = $11.2

Decrease in variable Cost = 20% = $2.80

Half of this is passed to customer in the form of reduction in sales price.

:. New Selling Price = $27 - $1.40 = $25.6

:. Sales = 65,310 * 25.6 .

New fixed cost = $547,000 + $97,000 = $644,000