Question

Exercise 19-05 Carey Company had sales in 2019 of $1,792,200 on 61,800 units. Variable costs totaled $855,200, and fixed costs totaled $487,000. 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 $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. CAREY 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.) CAREY COMPANY CVP Income Statement Total Per Unit

Answer 1

Answer:

For the year the computation is as follows:

PARTICULARS	TOTAL VALUE $	PER UNIT $
SALES	1,792,200	29.00
LESS: VARIABLE COSTS	865,200	14.00
CONTRIBUTION	927,000	15.00
LESS: FIXED COST	487,000	7.88
PROFIT	440,000	7.12

Here the no. of units sold were 61800.

The profit per unit arrived at 7.12 $ .

(a) Keeping the prices unchanged and assuming the sales increased by 5% in 2020, the total Profit earned is as follows:

Total No. of Units sold= 61800 X 105%=64,890 units

PARTICULARS	TOTAL VALUE $	PER UNIT $
SALES	1,881,810	29.00
LESS: VARIABLE COSTS	908,460	14.00
CONTRIBUTION	973,350	15.00
LESS: FIXED COST	511,333	7.88
PROFIT	462,017	7.12

The Profit per Unit remains unchanged but total earnings have changed.

(b) The projected CVP Income Statement for 2020 with reduction of raw material cost and reduction of variable cost would be:

Total No. of Units sold= 61800 X 105%=64,890 units

Reduction of Variable Cost per Unit =20% i.e., $14 X 80%= $11.20

The increase in Fixed operation would be $511,333 +107,000

and reduction of cost passed to customers @50% i.e., $2.80 X 50%=$1.40

Hence sale price per unit would be $29.00-1.40=$27.60 and sales Value is 64890 X $27.60=$1,790,964

Now the profit per unit is

PARTICULARS	TOTAL VALUE $	PER UNIT $
SALES	1,790,964	27.60
LESS: VARIABLE COSTS	726,768	11.20
CONTRIBUTION	1,064,196	16.40
LESS: FIXED COST	618,333	9.53
PROFIT	445,863	6.87

If observed the profit per unit is reduced by $0.25 due to passing of profit to customers.