Question

Presented is the 2009 contribution income statement of Colgate Products.

COLGATE PRODUCTS Contribution Income Statement For Year Ended December 31, 2009

Sales (18,000 units) $2,160,000

Less variable costs Cost of goods sold $720,000 Selling and administrative 198,000 (918,000)

Contribution margin 1,242,000

Less fixed costs Manufacturing overhead 750,000 Selling and administrative 320,000 (1,070,000)

Net income $172,000

During the coming year, Colgate expects an increase in variable manufacturing costs of $8 per unit and in fixed manufacturing costs of $108,000.

(a) If sales for 2010 remain at 18,000 units, what price should Colgate charge to obtain the same profit as last year?

(b) Management believes that sales can be increased to 24,000 units if the selling price is lowered to $109. 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 $172,000 with a unit selling price of $109? Answer units

Answer 1

(a)

Total Fixed cost in 2010 = $858000 + $320000 = $1178000

Net Income required in 2010 = $172000

Hence total contribution margin required in 2010 = Fixed costs + Net Income = $1178000 + $172000 = $1350000

Cost of goods sold in 2010 = $720000 + (18000 *$8) = $864000

Total Variable cost in 2010 = $864000 + $198000 = $1062000

Sales = Contribution margin + Total Variable costs = $1350000 + $1062000 = $2412000

Hence price Colgate should charge to obtain same profit as last year = $2412000 /18000 units = $134 per unit

(b)

Sales (24000 units * $109) $2,616,000

Less : Variable cost

Cost of goods sold (24000 units * $48) $1,152,000

Selling and admin expenses (24000 units * $11) $264,000

Contribution margin $1,200,000

Less : Fixed costs

Manufacturing Overhead $858,000

Selling and admin expenses $320,000

Expected profit $22,000

(c)

Total Fixed cost in 2010 = $858000 + $320000 = $1178000

Net Income required in 2010 = $172000

Hence total contribution margin required in 2010 = Fixed costs + Net Income = $1178000 + $172000 = $1350000

Contribution per units = Sale price per unit - Cost of goods sold per unit - selling & admin exp.per unit = $109 - $48 - $11 = $50 per unit

Sales volume needed = $1350000 / $50 = 27000 units