Question

In: Accounting

Polzin Company had sales in 2010 of $1,800,000 on 60,000 units. Variable costs totalled $860,000, and...

Polzin Company had sales in 2010 of $1,800,000 on 60,000 units. Variable costs totalled $860,000, and fixed costs totaled $550,000.

A new raw material is available that will decrease the variable costs per unit by 20% (or $2.80). However, to process the new raw material, fixed operating costs will increase by $65,000. 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 7.5% increase in the number of units sold.

Instructions

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

Solutions

Expert Solution

Answer:

POLZIN COMPANY

CVP Income Statement (Current)

For the Year Ended December 31, 2010

Total

Per Unit

Sales (60,000 X $30)................................................... $1,800,000                             $25

Variable expenses (60,000 X $14.33)..............................      860,000                        14.33

Contribution margin....................................................    940000 $10.67

Fixed expenses............................................................      550,000

Net income.................................................................. $  390,000

POLZIN COMPANY

CVP Income Statement (with changes)

For the Year Ended December 31, 2010

Total

Per Unit

Sales [64500 units (1) X $23.60 (2)].......................... $1522200 $23.60

Variable expenses [64500 X $11.46 (3)]....................      739170     11.46

Contribution margin (64500 X $12.14).....................    783030   $35.06

Fixed expenses ($550,000 + $65,000)....................... 615000

Net income.................................................................. $  168030

(1)      (60,000 X 107.5%).

(2)      $25.00 – ($2.80 X 50%) = $23.60.

(3)        $14.33 – ($14 .33 X 20%) = $11.46.

ekkarill92 answered 2 years ago
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