Booth Company had sales in 2014 of $1,875,000 on 75,000 units.
Variable costs totaled $1,125,000 and fixed costs totaled
$500,000.

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Question: Booth Company had sales in 2014 of $1,875,000 on 75,000 units. Variable costs totaled $1,125,000 …
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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 2014 (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 increase by 15% per unit and fixed costs will increase
by $50,000. Management feels that a $3 per unit price increase is
needed to accommodate the cost increases. However, this will result
in a 10% decrease in units sold. Prepare a CVP income statement
assuming these changes have been made.

(c) The marketing department suggests implementing an
advertising promotion that would increase variable costs by $.50
per unit but would retain the original sales volume of 75,000
units. Prepare a CPV income statement with these changes. Do you
recommend implementation of the advertising program? Why or why
not?

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