Problem 21-6A Analysis of price, cost, and volume changes for contribution margi

Question

Problem 21-6A Analysis of price, cost, and volume changes for contribution margin and net income LO P2,A The following information applies to the questions displayed below J This year Bertrand Company sold 43,000 units of its only product for $17.60 per unit Manufacturing and selling the product required $12B,000 of fixed manufecturing costs anid $188,000 of flixed selling and administretive costs. its per unit variable costs follow 0 Direct labor (paid on the basis of completed unts Variable overhead costs 3.80 Variable selling and administrative costs Net year te company wil use material, whet, we reduce material costs by 50% and direct labor costs by 50% and wil not affect produd quality or marketabilty Management is considering an ncrease in the unit sales price to reduce the number of units soid because the tactory's output is nearing its annual output capacity of 48,000 units Two plans are being considered Under plan 1 the company wil keep the increase income because of the reduced costsfrom usngthe new metena.urder plan 2, ee compeny wil increase prce by 20% This plan wl decrease unit sales volume by 5% Under both pians 1 and 2, the total fxed costs and the variable costs per unit for overhead and for selling and administrastive costs will remain the same Section Break Probiem 21-6A Analysis of price, cost. and volume changes for contribution margin and net income LO P2 A SAMSUNG 3 5 6 8

Explanation / Answer

New material cost per unit = 4.8 (1-.50) = 2.4

New labor cost per unit = 3.8 (1 -.50) = 1.90

Total variable cost per unit = 2.4 +1.9 +.48 +.28 =$ 5.06 unit

Total fixed cost = 128000+ 188000 =$ 316,000

for Plan 2 :

New selling price = 17.60 (1+.20) = 17.60*1.2 = 21.12

new volume =40850 units

Contribution margin statement

Plan 1 Plan 2 Number of units 43000 40850 sales 756800   [43000*17.6) 862752    [40850*21.12] less:Variable cost -217580   [43000*5.06] -206701   [40850*5.06] contribution 539220 656051 less:Fixed cost -316000 -316000 Income before taxes 223220 340051 less:Taxes (.30*Income before taxes) - 66966 - 102015.3 Net income 156254 238035.7

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