Question

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 79,000 units for $30 per unit. The variable production costs are $15, and fixed costs amount to $890,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 15 percent in the coming year. Of the $15 variable costs, 40 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 7 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 8 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. (Do not round intermediate calculations. Round up your answer for "Volume in units" to the nearest whole number and round your answer for "Sales" to the nearest whole dollar amount.)

Volume Unit
Sales

b. Compute the volume of sales and the dollar sales level necessary to provide the 8 percent increase in profits, assuming that the maximum price increase is implemented. (Do not round intermediate calculations. Round up your answer for "Volume in units" to the nearest whole number and round your answer for "Sales" to the nearest whole dollar amount.)

Volume Unit
Sales

c. If the volume of sales were to remain at 79,000 units, what price increase would be required to attain the 8 percent increase in profits? Calculate the new price. (Round your answer to 2 decimal places.)

New Price

Answer 1

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. (Do not round intermediate calculations. Round up your answer for "Volume in units" to the nearest whole number and round your answer for "Sales" to the nearest whole dollar amount.)

Volume Unit	83993 Units
Sales	$2771769

Current profit = 79,000 units × ($30 – $15) – $890,000 = $295000

Variable costs. New variable cost per unit:

Labor+Materials+Overhead

(120% × 40% × $15) + (115% × 20% × $15) + (125% × 40% × $15) = $18.15

Price:New price=110% × $30 = $33.00

Fixed costs:New fixed costs=107% × $890,000 = $952300

Sales:Profit target=$295000

Profit=(P – V)X – F

$295000=($33.00 – $18.15)X – $952300

$1247300 = $33X - $18.15X

X=83993 units (rounded up)

or sales of 83993 × $33.00=$2771769

b. Compute the volume of sales and the dollar sales level necessary to provide the 8 percent increase in profits, assuming that the maximum price increase is implemented. (Do not round intermediate calculations. Round up your answer for "Volume in units" to the nearest whole number and round your answer for "Sales" to the nearest whole dollar amount.)

Volume Unit	85582 units
Sales	$2824206

Profit target = $295000 × 108%= $318600

Profit=(P – V)X – F

$318600=($33.00 – $18.15)X – $952300

$1270900 = 14.85X

X = 85582

=85582 units (rounded up)

or sales of 85582 × $33.00= $2824206

c. If the volume of sales were to remain at 79,000 units, what price increase would be required to attain the 8 percent increase in profits? Calculate the new price. (Round your answer to 2 decimal places.)

New Price     = $34.24

Profit=PX – VX – F

$318600=P(79,000) – ($18.15 × 79,000) – $952300

$1270900 = P(79,000) - $1433850

P = $34.24