Cost-Volume-Profit (CVP) Income Statement: The cost-volume-profit income statement refers to that income statement which highlights the cost behavior as a variable cost and fixed costs. It also shows the contribution margin of the company. This statement is for the internal use in the company. The format of this statement depends upon the need of the business. Variable Cost: The variable costs are the costs which vary with the level of output. The variable cost is directly proportional to the number of units. Thus, it increases or decreases with the level of units of sale. Fixed Costs: The fixed costs are the costs which do not vary with the level of output. The fixed cost is constant and is not proportional to the number of units. To Prepare: (a) A CVP income statement, assuming no change in the given data.

Question

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.

Answer 1

Question

Chapter 6, Problem 6.5E

(a)

To determine

Cost-Volume-Profit (CVP) Income Statement: The cost-volume-profit income statement refers to that income statement which highlights the cost behavior as a variable cost and fixed costs. It also shows the contribution margin of the company. This statement is for the internal use in the company. The format of this statement depends upon the need of the business.

Variable Cost: The variable costs are the costs which vary with the level of output. The variable cost is directly proportional to the number of units. Thus, it increases or decreases with the level of units of sale.

Fixed Costs: The fixed costs are the costs which do not vary with the level of output. The fixed cost is constant and is not proportional to the number of units.

To Prepare: (a) A CVP income statement, assuming no change in the given data.

(b)

To determine

Cost-Volume-Profit (CVP) Income Statement: The cost-volume-profit income statement refers to that income statement which highlights the cost behavior as a variable cost and fixed costs. It also shows the contribution margin of the company. This statement is for the internal use in the company. The format of this statement depends upon the need of the business.

To Prepare: (b) A CVP income statement, assuming that changes have been made.

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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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Booth Company had sales in 2020 of $1,875,000 on 75,000 units. Variable costs totaled $1,125,000 and fixed costs totaled $500,000. A new raw material is available that will decrease the variable costs per unit by 20% (or $3.00). However, to process the new raw material, fixed operating costs will increase by $125,000. Management feels that two-thirds 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 department expects that this sales price reduction will result in a 4% increase in the number of units sold. Instructions (a) Prepare a projected CVP income statement for 2020 (1) assuming the changes have not been made, and (2) assuming that changes are made as described. (b) Before Booth Company had the chance to implement usage of the new raw material, new industry specifications were announced and result in the following changes for the Booth Company. Variable costs will…