Question

This year Burchard Company sold 40,000 units of its only product for $17.00 per unit. Manufacturing and selling the product required $125,000 of fixed manufacturing costs and $185,000 of fixed selling and administrative costs. Its per unit variable costs follow. Material $ 4.50 Direct labor (paid on the basis of completed units) 3.50 Variable overhead costs 0.45 Variable selling and administrative costs 0.25 Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 50% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the selling 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 the selling price by 20%. This plan will decrease unit sales volume by 5%. 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. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (35% rate), and net income.

Answer 1

For the next year Per unit cost and contribution margin will be as under

Per unit:		Plan 1		Plan 2
Sales		$17.00		$20.40
Variable Costs:
Material (4.50*50%)		2.25		2.25
Direct labor(3.50*50%)		1.75		1.75
Variable overhead costs		0.45		0.45
Variable S&A costs		0.25		0.25
Total variable costs		4.7		4.7
Contribution margin		$12.30		$15.70

Now we will make table for the forecasted contribution margin income as under

BURCHARD CO.
Forecasted Contribution Margin Income Statement
	Plan 1	Plan 2
Number of units:	40,000	38,000
Sales	$680,000	$775,200
Variable costs	188,000	178,600
Contribution margin	492,000	596,600
Fixed costs	310,000	310,000
Income before taxes	182,000	286,600
Income taxes (35%)	63,700	100,310
Net Income	118,300	186,290