Business Problem

Salahuddin Corporation had sales in 2021 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 2021 (1) assuming the changes have not been made, and (2) assuming that changes are made as described.

(b)

Before Salahuddin Corporation had the chance to implement usage of the new raw material, new industry specifications were announced and result in the following changes. 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)

Still implementing the changes in part (b), the marketing department suggests implementing an advertising promotion that would increase variable costs by $0.50 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?