Maddox Company had sales in 2010 of $1,200,000 on 60,000 units. Variable costs t

Question

Maddox Company had sales in 2010 of $1,200,000 on 60,000 units. Variable costs totaled $720,000, and fixed costs totaled $400,000.

A new raw material is available that will decrease the variable costs per unit by 20% (or $2.40). However, to process the new raw material, fixed operating costs will increase by $50,000. 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.

Instructions
Prepare a CVP income statement for 2010, assuming the changes are made as described.

Explanation / Answer

Given information:
Sales                       = $1,200,000 Units sold                = 60,000 Selling price (1,200,000 / 60,000) = $20 Total variable cost   = 720,000 Vraiable cost per unit (720,000 / 60,000) = $12 Total fixed cost        = 400,000 Decrease in variable cost per unit = $2.40 Decrease in total variable cost ($2.40 x 60,000) = 144,000 So new variable cost (720,000 - 144,000) = $576,000 Increase in fixed cost                                  = 50,000 So new fixed cost                                       = 450,000 Increase in sales units (5% of 60,000)         = 3,000 Total sales in units                                       = 63,000
CVP Income statement: Sales (63,000 x $20)             1,260,000 Less: variable cost                   (576,000) Contribution margin               684,000 Less: Fixed cost                      (450,000) Net income                           $234,000 Less: Fixed cost                      (450,000) Net income                           $234,000

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