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Product Pricing: Single Product Presented is the 2009 contribution income statement of Colgate Products. COLGATE PRODUCTS...

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

Solutions

Expert Solution

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.


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