Valero Company had sales in 2016 of $1,800,000 on 60,000 units. Variable costs totaled $720,000, and fixed costs totaled $570,000. A new raw material is available that will decrease the variable costs per unit by 20% (or $2.40). However, to process the new raw material, fixed operating costs will increase by $50,000. 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 depart ment expects that this sales price reduction will result in a 10% increase in the number of units sold. Instructions a) Prepare a CVP income statement for 2017, assuming the changes are made as described.
Valero Company had sales in 2016 of $1,800,000 on 60,000 units. Variable costs totaled $720,000, and fixed costs totaled $570,000.
A new raw material is available that will decrease the variable costs per unit by 20% (or $2.40). However, to process the new raw material, fixed operating costs will increase by $50,000. 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 depart ment expects that this sales price reduction will result in a 10% increase in the number of units sold.
Instructions
a) Prepare a CVP income statement for 2017, assuming the changes are made as described.
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