In: Accounting
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
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