Question

Need help with the accounting problem.

Required information Problem 21-6A Analysis of price, cost, and volume changes for contribution margin and net income LO P2, A1 (The following information applies to the questions displayed below.] 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 Direct labor (paid on the basis of completed units) Variable overhead costs Variable selling and administrative costs $4.50 3.50 0.45 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.

Answer 1

Per unit	Plan 1	Plan 2
Sales	$                         17.00	$17*120% = $20.40
Variable costs:
Material	$4.50*50% = $2.25	$4.50*50% = $2.25
Direct labor	$3.50*50% = $1.75	$3.50*50% = $1.75
Variable overhead costs	$                            0.45	$                             0.45
Variable S&A costs	$                            0.25	$                             0.25
Total variable costs	$                            4.70	$                             4.70
Contribution margin	$                         12.30	$                           15.70

Plan 1
Contribution margin ratio
Contribution margin	/	Selling price	=	Contribution margin ratio
12.3	/	17	=	72.35294%
Fixed Costs	/	Contribution margin ratio	=	Break-even point in dollars
$125,000+$185,000 = $310,000	/	72.35294%	=	$                          428,455.28

Plan 2
Contribution margin ratio
Contribution margin	/	Selling price	=	Contribution margin ratio
15.7	/	20.4	=	76.96078%
Fixed Costs	/	Contribution margin ratio	=	Break-even point in dollars
$125,000+$185,000 = $310,000	/	76.96078%	=	$                          402,802.55

BURCHARD CO
Forecasted Contribution Margin Income Statement
	Plan 1	Plan 2
Number of units	40,000	38,000
Sales	40,000*$17 = $680,000	38,000*$20.40 = $775,200
Less: Variable expenses	40,000*$4.70 = $188,000	38,000*$4.70 = $178,600
Contribution margin	$                                 492,000	$                                   596,600
Less: Fixed costs	$                                 310,000	$                                   310,000
Income before income tax	$                                 182,000	$                                   286,600
Income taxes	$182,000*35% = $63,700	$286,600*35% = $100,310
Net income (loss)	$                                 118,300	$                                   186,290

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