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 81,000 units for $65 per unit. The variable production costs are $35, and fixed costs amount to $1,410,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming year. Of the $35 variable costs, 40 percent are from labor and 20 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 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. (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 7 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 81,000 units, what price change would be required to attain the 7 percent increase in profits? Calculate the new price. (Round intermediate calculations of unit cost and final answer to 2 decimal places.)

Answer 1

(A)

Present Profit = $10,20,000

assuming that the maximum price increase is implemented

Contribution = Profit + Fixed Cost = $ 10,20,000+ $ 14,80,500 = $ 25,00,500

No. of units Sold = Contribution / Contribution per Unit = $ 25,00,500 / 30.9 = 80,922.3 = 80,293 Units

There for VOLUME OF SALES

UNITS = 80,293 UNITS

SALES = 80,293* $ 71.5 = $ 57,40,949.5

(B)

Present Profit = $10,20,000

7 % Increase in profits therfore NEW PROFIT = $10,20,000 + $10,20,000 * 7/100 = $ 10,91,400

Contribution = Profit + Fixed Cost = $ 10,91,400 + $ 14,80,500 = $ 25,71,900

No. of units Sold = Contribution / Contribution per Unit = $ 25,71,900 / 30.9 = 83,233.0097 = 83,234 Units

There for VOLUME OF SALES

UNITS = 83,234 UNITS

SALES = 83,234* $ 71.5 = $ 59,51,231

(C)

7 % Increase in profits therfore NEW PROFIT = $10,20,000 + $10,20,000 * 7/100 = $ 10,91,400

Contribution = Profit + Fixed Cost = $ 10,91,400 + $ 14,80,500 = $ 25,71,900

Contribution per unit to maintain 81,000 units =  $ 25,71,900 / 81,000 = $ 31.75

NEW SELLING PRICE =  CONTRIBUTION + VARIABLE COSTS = $ 31.75 + 16.1 + 7.7 + 16.8 = $72.35

NEW SELLING PRICE = $ 72.35