Question

ABC Inc. manufactures and sells toys.
Price and cost data are as follows:

Selling price per unit (package of 2 CDs)......................................	$20.00
Variable costs per unit:
Direct material...............................................................................................................	$4.00
Direct labor......................................................................................................................	$5.00
Artist's royalties..............................................................................................................	$3.50
Manufacturing overhead..........................................................................................	$3.00
Selling expenses............................................................................................................	$1.00
Total variable costs per unit............................................................	$16.50
Annual fixed costs:
Manufacturing overhead..........................................................................................	$180,000
Selling and administrative.......................................................................................	$220,000
Total fixed costs................................................................................	$400,000
Forecasted annual sales volume (120,000 units).........................	$2,400,000

If the company's direct-labor costs do increase by 8%, what selling price per unit of product must it charge to maintain the same contribution margin ratio?

(Please indicate your result with one decimal place. Example: 40.5)

Answer 1

Existing condition

Selling price per unit = $20

Variable cost per unit = $16,50

Contribution margin per unit = Selling price per unit- Variable cost per unit

= 20-16.50

= $3.50

Contribution margin ratio = Contribution margin per unit/Selling price per unit

= 3.50/20

= 17.5%

New condition

Increase in direct labor cost = 8%

Direct labor cost = $5

Increase in direct labor cost = 5 x 8%

= $0.4

Due to increase in direct labor cost per unit by $0.40 , variable cost per unit will increase by $0.40

New variable cost per unit = 16.50+0.40

= $16.90

Desired contribution margin ratio = 17.5%

New selling price per unit = ?

Let the new selling price per unit be $K

New contribution margin per unit = New selling price per unit - New variable cost per unit

= K - 16.90

Contribution margin ratio = New contribution margin per unit /New Selling price per unit

17.5% = (K-16.90)/K

0.175K = K-16.90

K = 16.90/0.825

= $20.50

Hence, selling price per unit of $20.50 must be charged to earn same Contribution margin ratio.

Kindly comment if you need further assistance.

Thanks‼!