Question

Carey Company had sales in 2016 of $1,792,000 on 64,000 units. Variable costs totaled $1.152.000, and fixed costs totaled $479,000 A new raw material is available that will decrease the variable costs per unit by 20% (or $3.60). However, to process the new raw material, fixed operating costs will increase by $98,000. 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.

Answer 1

	selling price per unit	1792000/64000=	28.00
	variable cost per unit	1152000/64000=	18.00
	fixed cost	4,79,000.00
	new variable cost	18-(18*0.2)	14.40
	Savings in VC	18-14.4	3.60
	New selling price	28-(3.6*.50)	26.20
	No of units sold (new)	64000+64000*5/100	67,200.00	UNITS
	PROJECTED INCOME STATEMENT
			TOTAL	PER UNIT
	sales(a)	67200*26.2	17,60,640.00	26.20
Less	variable cost(b)	67200*14.40	9,67,680.00	14.40
	contribution(c=a-b)		7,92,960.00	11.80
Less	Fixed Cost(d)	479000+98000	5,77,000.00
	Profit/(Loss){e=c-d}		2,15,960.00