Question

6. 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 82,000 units for $70 per unit. The variable production costs are $40, and fixed costs amount to $1,420,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 5 percent in the coming year. Of the $40 variable costs, 45 percent are from labor and 25 percent are from materials. Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 5 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 6 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.) b. Compute the volume of sales and the dollar sales level necessary to provide the 6 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.) c. If the volume of sales were to remain at 82,000 units, what price change would be required to attain the 6 percent increase in profits? Calculate the new price. (Round intermediate calculations of unit cost and final answer to 2 decimal places.)

Answer 1

Answer)

Note:The units are required to show at near whole number and hence I will show it at next whole no. As showing at before whole no. May decrease profit than expected.

Current profit:

Sales- Variable costs--ixed costs:

(82000units×$70)-(82000units×$40)-$1420000

=$1040000

New selling price:

$70×110%=$77

New direct material cost:

$40×25%×105%=$10.5

New labour cost=

$40×45%×115%=20.7

New varible over head cost:

$40×(100-45-25)%×120%=$14.4

Total variable cost=$10.5+$20.7+$14.4=$45.6

Fixed cost=$1420000××105%

=$1491000

Answer for a)

Volume in units to maintain current profits:

(Fixed costs+profit)/(sales price-variable cost)

=($2531000)/$31.4

=80606 units

Sales in dollars:

80606 units×$77=$6206662

Answer for b)

If profit raised then sales in units:

($1491000+($1040000×1.06))/$31.4

=$2593400/$31.4

=82593 units

Sales in dollars=82593units×$77

=$6359661

Answer for 3)

New selling price at 82000 volume:

(Profit+fixed cost+total variable costs)/82000units

=($1491000+($1040000×1.06)+(82000units×$45.6))/82000units

=$77.23