Question

Required information [The following information applies to the questions displayed below.] This year Burchard Company sold 45,000 units of its only product for $18.00 per unit. Manufacturing and selling the product required $130,000 of fixed manufacturing costs and $190,000 of fixed selling and administrative costs. Its per unit variable costs follow. Material $ 5.00 Direct labor (paid on the basis of completed units) 4.00 Variable overhead costs 0.50 Variable selling and administrative costs 0.30 Next year the company will use new material, which will reduce material costs by 70% and direct labor costs by 30% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory's output is nearing its annual output capacity of 50,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 30%. This plan will decrease unit sales volume by 15%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

Answer 1

Particulars	Plan 1	Plan 2
Number of units	45,000	38,250
Sales Revenue	810,000	895,050
Less: Variable cost
Material	(67,500)	(57,375)
Direct labour	(126,000)	(107,100)
Overhead cost	(22,500)	(19,125)
variable administrative cost	(13,500)	(11,475)
Contribution margin	580,500	699,975
(-) Fixed manufacturing cost	(130,000)	(130,000)
(-) Fixed selling cost	(190,000)	(190,000)
Income before tax	260,500	379,975
Less: Tax@40%	(104,200)	(151,990)
Net income	156,300	227,985