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 93,000 units for $85 per unit. The variable production costs are $50, and fixed costs amount to $1,530,000. 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 $50 variable costs, 60 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 4 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 5 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 5 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 93,000 units, what price change would be required to attain the 5 percent increase in profits? Calculate the new price. (Round intermediate calculations of unit cost and final answer to 2 decimal places.) New Price __________________

Answer 1

	Current Income Statement
	Sales		=93000*85$			$       79,05,000
	Less: Variable Costs
	Direct Material		=93000*(50$*20%)			$          9,30,000
	Direct Labour		=93000*(50$*60%)			$       27,90,000
	Variable Overhead		=93000*(50$*20%)			$          9,30,000
	Less: Fixed Cost					$       15,30,000
	Current Profits					$       17,25,000
	Expected Rise Calculation
			Current per unit	% Rise	After Rise per unit
	Sale Price		$          85.00	10%	$ 93.50
	Direct Material		$          10.00	10%	$               11.00
	Direct Labour		$          30.00	15%	$ 34.50
	Variable Overhead		$          10.00	20%	$ 12.00
	Fixed Cost(in Total)		$ 15,30,000	4%	$       15,91,200
	Profits(in Total)		$ 17,25,000	5%	$       18,11,250
	a.)
	New Contribution per unit			=93.5-11-34.5-12		$ 36.00
	Profit Required					$       17,25,000
	New Fixed Cost					$       15,91,200
	Total Contribution Required			=Profit+Fixed Cost		$       33,16,200
	No of Units		=Total Cont./ Cont. per unit			92117
	Total Sales		=92117*93.5			$       86,12,940
	b)
	New Contribution per unit			=93.5-11-34.5-12		$ 36.00
	Profit Required					$       18,11,250
	New Fixed Cost					$       15,91,200
	Total Contribution Required			=Profit+Fixed Cost		$       34,02,450
	No of Units		=Total Cont./ Cont. per unit			94513
	Total Sales		=94513*93.5			$       88,36,966
	c)
	Profit Required					$       18,11,250
	New Fixed Cost					$       15,91,200
	Total Contribution Required			=Profit+Fixed Cost		$       34,02,450
	No of Unit					93000
	Cont. per Unit		=Total Cont./ No of Units			$ 36.59
	Sale Price		=Variable Cost + Cont. per unit			=11+34.5+12+36.59
						$ 94.09
	New Price		$          94.09