Hudson Co. reports the contribution margin income statement for 2019. HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales (10,600 units at $300 each) Variable costs (10,600 units at $240 each) Contribution margin Fixed costs $3,180,000 2,544,000 636,000 480,000 Pretax income $ 156,000 The marketing manager believes that increasing advertising costs by $110,000 in 2020 will increase the company's sales volume to 12,000 units. Prepare a forecasted contribution margin income statement for 2020 assuming the company incurs the additional advertising costs. HUDSON CO. Forecasted Contribution Margin Income Statement For Year Ended December 31, 2020
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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Hudson Co. reports the contribution margin income statement for 2019.
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**HUDSON CO.**
*Contribution Margin Income Statement*
*For Year Ended December 31, 2019*
| Description | Amount |
|---------------------------------------------------|-------------|
| Sales (10,600 units at $300 each) | $3,180,000 |
| Variable costs (10,600 units at $240 each) | 2,544,000 |
| Contribution margin | 636,000 |
| Fixed costs | 480,000 |
| Pretax income | $156,000 |
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The marketing manager believes that increasing advertising costs by $110,000 in 2020 will increase the company’s sales volume to 12,000 units. Prepare a forecasted contribution margin income statement for 2020 assuming the company incurs the additional advertising costs.
---
**HUDSON CO.**
*Forecasted Contribution Margin Income Statement*
*For Year Ended December 31, 2020*
| Description | Amount |
|---------------------------------------------------|-------------|
| Sales | |
| Variable costs | |
| Contribution margin | |
| Fixed costs | |
| Income (pretax)/Loss | |
Should the company incur the additional advertising costs?
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