Question

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 61,000 units for $35 per unit. The variable production costs are $20, and fixed costs amount to $710,000. 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 $20 variable costs, 40 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.

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.)

b. Compute the volume of sales and the dollar sales level necessary to provide the 6 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.)

c. If the volume of sales were to remain at 61,000 units, what price increase would be required to attain the 6 percent increase in profits? Calculate the new price. (Round your answer to 2 decimal

Answer 1

Present Labour cost = 20 * 40% = 8

Present Material cost = 20 * 20% = 4

Present variable O/H = 20 * 40% = 8

Revised Labour cost = 8 * 115% = 9.2

Revised Material cost = 4 * 110% = 4.4

Revised Variable O/H = 8 * 120% = 9.6

Revised Variable cost pu = 9.2 + 4.4 + 9.6 = 23.2

Revised Fixed cost = 710000 * 104% = 738400

Revised Sale price = 35 * 110% = 38.5

Present Profit:-

Units sold (SP – VC) – FC = Profit

61000(35 – 20) – 710000 = $205000

(a) Target Profit = Present Profit = 205000

Units sold (SP – VC) – FC = Profit

Let X be the units sold

X (38.5 – 23.2) – 738400 = 205000

X = 61660 units

Sales in $ = 61660 * 38.5 = $ 2373910

(b) Target Profit = Present Profit * 106%

         = 205000 * 106% = 217300

Units sold (SP – VC) – FC = Profit

Let X be the units sold

X (38.5 – 23.2) – 738400 = 217300

X = 62464 units

Sales in $ = 62464 * 38.5 = $ 2404864

(c) Target Profit = Present Profit * 106%

          = 205000 * 106% = 217300

Units sold = 61000

Let X be the SP pu

61000 (X – 23.2) – 738400 = 217300

61000 X – 1415200 – 738400 = 217300

61000 X = 2370900

X = $38.87

Increase in SP = 38.87 - 35 = 3.87