Carey Company had sales in 2019 of $1,658,800 on 63,800 units. Variable costs totaled $1,148,400, and fixed costs totaled $467,000. A new raw material is available that will decrease the variable costs per unit by 20% (or $3.60). However, to process the new raw material, fixed operating costs will increase by $94,000. 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.

Requried:

a. Prepare a projected CVP income statement for 2020, assuming the changes have not been made.

b. Prepare a projected CVP income statement for 2017, assuming that changes are made as described.

Carey Company

a) Projected CVP Income Statement for 2020 (without changes):

Sales $1,658,800

Variable costs 1,148,400

Contribution $510,400

Fixed Costs 467,000

Profit $43,400

b) Projected CVP Income Statement for 2020 (with changes)

Sales $1,621,158

Variable costs 964,656

Contribution $656,502

Fixed Costs 561,000

Profit $95,502

Explanation:

a) Sales units will increase from 63,800 to 66,990 (63,800 x 1.05)

b) Old selling price = $1,658,800/63,800 = $26 per unit

c) New selling price = $26.00 - $1.80 = $24.20 per unit

d) Old variable cost per unit = $1,148,400/63,800 = $18

e) New variable cost per unit = $18 - 3.60 = $14.40

f) Sales Value = $24.20 x 66,990 = $1,621,158

g) Variable costs = $14.40 x 66,990 = $964,656

h) New fixed cost = $467,000 + 94,000 = $561,000

i) A CVP Income Statement is a Cost Volume Profit income statement whereby the costs are identified according to their cost behaviors of whether they are fixed or variable or semi-fixed.