9 Burchard Company sold 45,000 units of its only product for $18.00 per unit this year. Manufacturing and selling theproduct required $320,000 of fixed costs. Its per unit variable costs follow.Direct materialsDirect laborVariable overhead costsVariable selling and administrative costsFor the next year, management will use a new material, which will reduce direct materials costs to $1.50 per unit andreduce direct labor costs to $2.80 per unit. Sales, total fixed costs, variable overhead costs per unit, and variable sellingand administrative costs per unit will not change. Management is also considering raising its selling price to $23.40 perunit, which would decrease unit sales volume to 38,250 units.2. Prepare a contribution margin income statement for next year with two columns showing the expected results of (a) using the newmaterial and (b) using the new material and increasing the selling price.BURCHARD COMPANYContribution Margin Income StatementNumber of units:With new material$45,000$ 5.004.000.500.30With newmaterial andprice increase0 $38,25000

Answered: Burchard Company sold 45,000 units of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Burchard Company sold 45,000 units of its only product for $18.00 per unit this year. Manufacturing and selling the
product required $320,000 of fixed costs. Its per unit variable costs follow.
Direct materials
Direct labor
Variable overhead costs
Variable selling and administrative costs
For the next year, management will use a new material, which will reduce direct materials costs to $1.50 per unit and
reduce direct labor costs to $2.80 per unit. Sales, total fixed costs, variable overhead costs per unit, and variable selling
and administrative costs per unit will not change. Management is also considering raising its selling price to $23.40 per
unit, which would decrease unit sales volume to 38,250 units.
2. Prepare a contribution margin income statement for next year with two columns showing the expected results of (a) using the new
material and (b) using the new material and increasing the selling price.
BURCHARD COMPANY
Contribution Margin Income Statement
Number of units:
With new material
$
45,000
$ 5.00
4.00
0.50
0.30
With new
material and
price increase
0 $
38,250
0
0

Expert Solution

Step 1

When a contribution margin income statement is prepared, the total variable costs are deducted from the total sales revenue. This format of income statement shows the amount of contribution margin and then ascertain the net income of the business. In this format of income statement, the fixed costs and variable costs are calculated separately which helps in scenario analysis.

The purpose of preparing the contribution margin income statement is to ascertain the contribution margin along with the net income. This facilitates the comparison with previous year, forecasting the next year's figures and comparing the two different manufacturing plan.