Question

Presented is the 2009 contribution income statement of Colgate Products.

COLGATE PRODUCTS Contribution Income Statement For Year Ended December 31, 2009
Sales (12,000 units)		$1,440,000
Less variable costs
Cost of goods sold	$480,000
Selling and administrative	132,000	(612,000)
Contribution margin		828,000
Less fixed costs
Manufacturing overhead	530,000
Selling and administrative	200,000	(730,000)
Net income		$98,000

Next year, Colgate expects an increase in variable manufacturing costs of $6 per unit and in fixed manufacturing costs of $48,000.

(a) If sales for 2010 remain at 12,000 units, what price should Colgate charge to obtain the same profit as last year?
$Answer

(b) Management believes that sales can be increased to 16,000 units if the selling price is lowered to $105. What would be the excepted profit (or loss) as a result of this action? Use a negative sign with your answer, if appropriate.
Answer

(c) After considering the expected increases in costs, what sales volume is needed to earn a pretax profit of $98,000 with a unit selling price of $105?
Answer

units

Answer 1

a) Sales for 2010 = 12,000 units. Price at which Colgate should be sold for profit of $ 98,000 :

Desired profit 98,000

Add : Fixed Expenses

         Manufacturing Overhead (530,000 + 48,000) 578,000

          Selling and Administrative 200,000

CONTRIBUTION MARGIN   876,000

Add : Variable costs

          Cost of goods sold                                                         480,000

          Selling and Administrative 132,000

          Manufacturing Overhead(12,000 x 6)                            72,000

SALES   1,560,000

Number of units 12,000

Sales price per unit (1,560,000 ÷ 12,000)           $ 130

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b) Expected profit when selling price = $105 and units sold = 16,000 units:

Sales (16,000 x 105) 1,680,000

Less : Variable costs

          Cost of goods sold 480,000

          S & A 132,000

          Manufacturing OHs

          (16,000 x 6)                             96,000 708,000

CONTRIBUTION MARGIN 972,000

Less : Fixed costs

          Manufacturing OHs 578,000

          S & A 200,000 778,000

NET INCOME 194,000     

Expected profit when 16,000 units are sold at $ 105 per unit = $ 194,000.

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c) Sales volume for pretax profit of $ 98,000 at unit selling price of $ 105 :

Desired profit 98,000

Add : Fixed Expenses

         Manufacturing Overhead (530,000 + 48,000) 578,000

          Selling and Administrative 200,000

CONTRIBUTION MARGIN   876,000

Contribution = Sales - Variable Cost

Let the number of units sold be x.

Sales = 105x

Variable cost = 480,000 + 132,000 + 6x

Contribution = 876,000 = 105x - ( 612,000 + 6x)

99x = 1,488,000

x = 1,488,000 ÷ 99

x = 15,030.30 = 15,030(rounded) units

Units to be sold for a pretax of $ 98,000 at unit selling price of $105 = 15,030 units