Selling price per unit (package of 2 CDs)...................................... $20.00 Variable costs per unit: Direct material............................................................................................................... $4.00...

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

Solutions

Expert Solution

Present situation

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%

Future position

Increase in direct labor cost = 8%

= 5 x 8%

= $0.4

Due to increase in direct labor cost by $0.4 per unit, variable cost per unit will also increase by $0.40

Variable cost per unit = 16.50 + 0.4

= $16.90

Selling price per unit = ?

Contribution margin ratio = 17.5%

Contribution margin ratio = (Selling price per unit - variable cost per unit)/Selling price per unit

0.175 = (Selling price per unit - 16.90)/Selling price per unit

0.175 selling price per unit = Selling price per unit - 16.90

0.175 selling price per unit - Selling price per unit = -16.90

-0.825 selling price per unit = -16.90

Selling price per unit = 16.90/0.825

= $20.48

selling price per unit of product must it charge to maintain the same contribution margin ratio = $20.48

ekkarill92 answered 1 year ago

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