Carey Company had sales in 2020 of $1,560,000 on 60,000 units. Variable costs totaled $900,000, and fixed costs totaled $500,000.

A new raw material is available that will decrease the variable cost per unit by 20% (or $3). However, to process the new raw material, fixed operating costs will increase by $100,000, Managements 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 sale price reduction will result in a 5% increase in the number of units sold.

Instructions

1. assuming the changes have not been made, and
2. assuming that changes are made as described.

Solution