Question

Scholes Systems supplies a particular type of office chair to large retailers such as Target, Costco, and Office Max. Scholes is concerned about the possible effects of inflation on its operations. Presently, the company sells 96,000 units for $60 per unit. The variable production costs are $30, and fixed costs amount to $1,560,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 5 percent in the coming year. Of the $30 variable costs, 60 percent are from labor and 20 percent are from materials. Variable overhead costs are expected to increase by 25 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 6 percent as a result of increased taxes and other miscellaneous fixed charges. The company wishes to maintain the same level of profit in real dollar terms. It is expected that to accomplish this objective, profits must increase by 7 percent during the year. Required: a. Compute the volume in units and the dollar sales level necessary to maintain the present profit level, assuming that the maximum price increase is implemented. b. Compute the volume of sales and the dollar sales level necessary to provide the 7 percent increase in profits, assuming that the maximum price increase is implemented. c. If the volume of sales were to remain at 96,000 units, what price change would be required to attain the 7 percent increase in profits? Calculate the new price.

Answer 1

Present Costs
Sales units	96000 Units
Selling Price	$60 per unit
Variable Cost	$30 per unit
Fixed Cost	$15,60,000
Increase in Cost
Labour Cost	20%
Material cost	5%
Variable OH	25%
Propotion of Variable Cost in $30
Labour Cost	60%
Material Cost	20%
Variable OH	20%
Increase in Fixed Cost 6%
Calculation of Increased Variable Cost
Labour	= 30 X 60/100	= $18 per unit
Increased Labour Cost	= 18 + (18 X20/100)	=$21.6 per unit
Material Cost	= 30 X 20/100	= $6 per unit
Increased Material caost	= 6 + (6 X 5/100)	= $6.3 per unit
Variable OH	= 30 X 20/100	= $6 per unit
Increasd Variable OH	= 6 + (6 X 25/100)	= $7.5 per unit
Inreased fixed cost	= 15,60,000 + (15,60,000 X 6/100)
	= $ 16,53,600
Increse in Selling Price	10%
New Selling Price	$66 per unit
a) Sales for Maintain the present profit level
Present Profit Level
Sales	= 96,000 X 60	= $57,60,000
Variablt Cost	= 96,000 X 30	= $2880000
Fixed Cost		$ 15,60,000
Total Cost	= 28,80,000 + 15,60,000	= $ 44,40,000
Profit	= 57,60,000 - 44,40,000	= $13,20,000
Increase price	$66 per unit
Profit level maintained	= $13,20,000
Contribution per Unit	= 66 - 35.40	= $ 30.6 per unit
Total Contribution	= 13,20,000 + 16,53,000
	= $29,73,000
Number of units sold to reach for earn $29,73,000 contribution
	= 29,73,000/30.6
	= 97,157 units
Total Value of Sales	= 97157 X 66
	= $64,12,632
Variable Cost	= 97157 X 35.4
	= $34,39,358
Profit	= 64,12,632 - 34,39,358
	= $29,73,004
b) Increase of profit @ 7%
Incresed profit	= 13,20,000 + (29,73,000 X 7/100)
	= 14,12,400
Contribution	Fixed Cost + Profit
	= 16,53,000 + 14,12,400
	= $30,65,400
Contribution per unit	= 66 - 35.4
	= $30.6 per unit
Number of units sold to reach for earn $30,65,400 contribution
Sales unit	= 30,65,400/30.6
	=1,00,177 units
Total Value of Sales	= 1,00,177 X 66
	= $66,11,682
c) Sales unit 96,000 and increse the profit 7%
Sales unit	96,000 units
Fixed Cost	= $16,53,000
Variable Cost per unit	= 35.4 units
Desired Profit	= 13,20,000 X 7/100
	= 14,12,400
Total Cost	=16,53,000 + (96000 X 35.4)
	= $50,51,400
Total Sales Value	= Total Cost + Profit
	= 50,51,400 + 14,12,400
	= $64,63,800
Unit price	= 64,63,800/96000
	= 67.33 per unit