In: Accounting
Product Pricing: Single Product
Presented is the 2009 contribution income statement of Colgate
Products.
COLGATE PRODUCTS Contribution Income Statement For Year Ended December 31, 2009 |
||
---|---|---|
Sales (6,000 units) | $720,000 | |
Less variable costs | ||
Cost of goods sold | $240,000 | |
Selling and administrative | 66,000 | (306,000) |
Contribution margin | 414,000 | |
Less fixed costs | ||
Manufacturing overhead | 290,000 | |
Selling and administrative | 90,000 | (380,000) |
Net income | $34,000 |
During the coming year, Colgate expects an increase in variable
manufacturing costs of $6 per unit and in fixed manufacturing costs
of $24,000.
(a) If sales for 2010 remain at 6,000 units, what price should
Colgate charge to obtain the same profit as last year?
____
(b) Management believes that sales can be increased to 8,000 units
if the selling price is lowered to $105. What would be the excepted
profit (or loss) as a result of this action? Use a negative sign
with your answer, if appropriate.
____
(c) After considering the expected increases in costs, what sales
volume is needed to earn a profit of $34,000 with a unit selling
price of $105?
____ units
Answer (A)
Profit | 34,000 | ||
Add : Fixed Cost | |||
Selling & Administrative | 90,000 | ||
Manufacturing overhead | (290,000+24000) | 3,14,000 | |
Contribution Margin | 4,38,000 | ||
Add : Variable Cost | |||
Cost of goods sold | (240000+6000*6) | 2,76,000 | |
Selling & Administrative | 66,000 | ||
Sales | 7,80,000 | ||
No. of Units | 6,000 | ||
Sales price per unit | 130 |
Answer (B)
Sales | (8000*105) | 8,40,000 | |
Less : Variable Cost | |||
Cost of goods sold | (276000*8000/6000) | 3,68,000 | |
Selling & Administrative | (66000*8000/6000) | 88,000 | |
Contribution Margin | 3,84,000 | ||
Less : Fixed Cost | |||
Selling & Administrative | 90,000 | ||
Manufacturing overhead | (290,000+24000) | 3,14,000 | |
Profit | -20,000 |
Answer (C)
Profit | 34,000 | ||
Add : Fixed Cost | |||
Selling & Administrative | 90,000 | ||
Manufacturing overhead | (290,000+24000) | 3,14,000 | |
Contribution Margin | 4,38,000 |
From the table above, Contribution shall be 438000.
If the number of unit is 'x',
The variable cost shall be 46 (276000/6000) + 11 (66000/6000) = $57
At a sale price of 105 per unit, sales shall be - 105x
now, the total variable cost shall be - 57x
We know, Total Variable cost = Total Sales - Contribution Margin.
Solving the equation 57x = 105x - 438000
105x - 57x = 438000
48x = 438000
x = 9125.
Thus, the number of unit shall be 9125.