Question

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 67,000 units for $40 per unit. The variable production costs are $21, and fixed costs amount to $770,000. 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 $21 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.(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 in units
Sales

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.)

Volume in Units
Sales

c. If the volume of sales were to remain at 67,000 units, what price increase would be required to attain the 7 percent increase in profits? Calculate the new price. (Round your answer to 2 decimal places.)

New price

Answer 1

Solution:

Following is the current situation of Argentina Partners

	Total $ (67,000 Units)	Per Unit
Sales	26,80,000.00	40.00
Variable Costs	-
Material	2,81,400.00	4.20
Labour	8,44,200.00	12.60
Variable Overhead Costs	2,81,400.00	4.20
Total Variable Costs	14,07,000.00	21.00
Contribution = Sales - Total Variable Cost	12,73,000.00	19.00
Total Fixed Costs	7,70,000.00	11.49
Profit = Contribution - Fixed Cost	5,03,000.00	7.51

Solution 1) Calculation of volume in units and the dollar sales level necessary to maintain the present profit level, assuming that the maximum price increase is implemented.

	Per Unit
Sales	44.00
Variable Costs
Material ($4.20 x 1.15)	4.83
Labour ($12.60 x 1.20)	15.12
Variable Overhead Costs ($4.20 x 1.25)	5.25
Total Variable Costs	25.20
Contribution = Sales - Total Variable Cost	18.80

Required Sales in units = (Fixed Cost + Desired Profit)/ Contribution per unit

                                         = (816,200 + 503,000) / 18.80

                                         = 70,170.21 Units

Required Sales in units to earn a profit of $503,000 is 70,170 units

Required Sales In Dollars = (Fixed Cost + Desired Profit)/ Profit Volume Ratio

Profit Volume Ratio = Contribution per unit/ Sales per unit

                                    = 18.80 / 44.00 = 0.4273

Required Sales In Dollars = (816,200 + 503,000) / 0.4273

                                             = $3,087,489.36

Required Sales in Dollars to earn a profit of $503,000 is $3,087,489

Solution 2) Calculation of volume of sales and the dollar sales level necessary to provide the 7 percent increase in profits.

New Profit = $503,000 x 1.07 = $538,210

Required Sales in units = (Fixed Cost + Desired Profit)/ Contribution per unit

                                         = (816,200 + 538,210) / 18.80

                                         = 72,043.09 Units

Volume of sales necessary to provide the 7 percent increase in profits is 72,043 Units

Required Sales In Dollars = (Fixed Cost + Desired Profit)/ Profit Volume Ratio

Profit Volume Ratio = Contribution per unit/ Sales per unit

                                    = 18.80 / 44.00 = 0.4273

Required Sales In Dollars = (816,200 + 538,210) / 0.4273

                                             = $3,169,895.74

Dollar sales necessary to provide the 7 percent increase in profits is $3,169,896

Solution 3) Calculation of New Selling Price per unit If the volume of sales were to remain at 67,000 units to attain the 7 percent increase in profits.

Let the New Selling Price be x

Therefore, 67,000x - (67,000 x 25.20) – 816,200 = 538,210

                  67000x - 1,688,400 – 816,200 = 538,210

                   67000x = 3,042,810

                    X = 45.41507

Therefore, new selling price to earn 7 percent increase in profits at sales level of 67,000 units is $45.41507