E6-5 Hall Company had sales in 2014 of $1,560,000 on 60,000 units. Variable cost
ID: 2388783 • Letter: E
Question
E6-5 Hall Company had sales in 2014 of $1,560,000 on 60,000 units. Variable costs totaled $720,000, and fixed costs totaled $500,000.A new raw material is available that will decrease the variable costs per unit by 25% (or $3.00). However; to process the new raw material, fixed operating costs will increase by $150,000. Management feels that one-half of the decline in the variable costs per unit department expects that this sales price reduction will result in a 5% increase in the number of units sold.
Instructions
Prepare a projected CVP income statement for 2014 (a) assuming the changes have not been made, and (b) assuming that changes are made as described.
Explanation / Answer
Assuming changes have not been made
Total contribution = Total sales - Total Variable costs = 1560000 - 720000 = $840000
Contribution per unit = 840000/60000 = $14/unit
Breakeven units = $500000/14 = 35714 units
Income statement:
Sales: 1560000
Variable costs: (720000)
Contribution: 840000
Fixed Costs: (500000)
Income/Profit: 340000
Assuming changes have been made
Previous variable costs per unit = 720000/60000 = $12/unit
New variable costs per unit = $12 - 3 = $9
New fixed cost = 500000 + 150000 = 650000
Sales volume = 60000 x 1.05 = 63000
New selling price = 1560000/60000 - 3 x 0.5 = $24.5
New sales revenue = 63000 x 24.5 = 1543500
New variable costs = 9 x 63000 = 567000
Income statement:
Sales: 1543500
Variable costs: (567000)
Contribution: 976500
Fixed Costs: (650000)
Income/Profit: 326500
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