Chapter 5 Problem Question 5 This year Burchard Company sold 36,000 units of its

Question

Chapter 5 Problem Question 5

This year Burchard Company sold 36,000 units of its only product for $16.20 per unit. Manufacturing and selling the product required $121,000 of fixed manufacturing costs and $181,000 of fixed selling and administrative costs. Its per unit variable costs follow. Material Direct labor (paid on the basis of completed units) Variable overhend costs Variable selling and administrative costs S 4.10 %28 0.41 0.21 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 sales price to reduce the number of units sold becouse the factory's output is nearing its annual output capacity of 41,000 units. Two plans are being considered. Under plan 1, the company will keep the 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 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.

Explanation / Answer

Thus Plan1 is better as its Net Income is higher.

BURCHARD CO. Forecasted Contribution Margin Income Statement Plan 1 Plan 2 Sales 583200 Sales 644436 Less Variable Costs Less Variable Costs Material (@ $ 1.23) 44280 Material (@ $ 4.10) 125460 Direct Labor (@ $ 2.17) 78120 Direct Labor (@ $ 3.10) 94860 Variable overhead costs (@ $ 0.41) 14760 Variable overhead costs (@ $ 0.41) 12546 Variable Selling and administrative costs (@ $ 0.21) 7560 144720 Variable Selling and administrative costs (@ $ 0.21) 6426 239292 Contribution Margin 438480 Contribution Margin 405144 Less Fixed Costs Less Fixed Costs Manufacturing and selling 121000 Manufacturing and selling 121000 Selling and administrative costs 181000 302000 Selling and administrative costs 181000 302000 Income before taxes 136480 Income before taxes 103144 Less Income Taxes (@30%) 40944 Less Income Taxes (@30%) 30943.2 Net Income 95536 Net Income 72200.8

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