E5 - Carey Company had sales in 2016 of $1,560,000 on 60,000 units. Variable costs totaled $900,000, and xed costs totaled $500,000. A new raw material is available that will decrease the variable costs per unit by 20% (or $3). However, to process the new raw material, xed operating costs will increase by $100,000. 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 department expects that this sales price reduction will result in a 5% increase in the num-ber of units sold.

Prepare a projected CVP income statement for 2017 (a) assuming the changes have not been made, and (b) assuming that changes are made as described.

E15 - Casas Modernas of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Rafael Jiminez, Casas owner, is considering replacing the draftsmen with a computerized draft-ing system. However, before making the change, Rafael would like to know the conse-quences of the change, since the volume of business varies signicantly from year to year. Shown below are CVP income statements for each alternative.

Manual Computerized System System

Sales $1,500,000 $1,500,000 Variable costs 1,200,000 600,000 Contribution margin 300,000 900,000 Fixed costs 100,000 700,000 Net income $ 200,000 $ 200,000

(a) Determine the degree of operating leverage for each alternative. (b) Which alternative would produce the higher net income if sales increased by $150,000? (c) Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss.