Question

Product Pricing: Single Product

Presented is the 2017 contribution income statement of Grafton Products.

GRAFTON PRODUCTS

Contribution Income Statement

For Year Ended December 31, 2017

Sales (13,000 units) .................................... $2,925,000

Less variable costs

Cost of goods sold ................................... $780,000

Selling and administrative.............................. 208,000

(988,000)

Contribution margin .................................... 1,937,000

Less fixed costs

Manufacturing overhead............................... 780,000

Selling and administrative.............................. 315,000

(1,095,000)

Net income ........................................... $ 842,000

During the coming year, Grafton expects an increase in variable manufacturing costs of $12 per unit

and in fixed manufacturing costs of $39,000.

Required

a. If sales for 2018 remain at 13,000 units, what price should Grafton charge to obtain the same profit

as last year?

b. Management believes that sales can be increased to 16,000 units if the selling price is lowered to

$200. Is this action desirable?

c. After considering the expected increases in costs, what sales volume is needed to earn a profit of

$254,800 with a unit selling price of $200?

Answer 1

• All working forms part of the answer
• Working on current year data to calculate per unit figures

	Unit	per unit	Amount
Sales	13000	$225	$2925000
(-) variable cost of Goods sold	13000	$60	$780000
(-) Variable selling & admin	13000	$16	$208000
Contribution margin	13000	$149	$1937000
(-) Fixed Cost:
manufacturing			$780000
selling & administrative			$315000
Net Income			$842000

In Coming Year:

Variable cost in coming year [60 +16 + 12]	$88 per unit
Fixed cost in coming year [780000+315000 + 39000]	$1,134,000

• Answer (a)

Let the sales price per unit be ‘x’, then

13000x[Sales] - (13000x$88)[Variable cost] - 1134000[Fixed cost] = 842000 [Net Income]

13000x - 1144000 - 1134000 = 842000

13000x = 842000 + 1144000 + 1134000

13000x = 3120000

x = 3120000 / 13000

x = $240 per unit = Sale price per unit

• Answer (b)

	Unit	per unit	Amount
Sales	16000	$200	$3200000
(-) variable cost of Goods sold	16000	$72	$1152000
(-) Variable selling & admin	16000	$16	$256000
Contribution margin	16000	$112	$1792000
(-) Fixed Cost:
manufacturing			$819000
selling & administrative			$315000
Coming year expected Income			$658,000
Current Year Income			$842,000
Increase (Decrease) in Income			$(184,000)

Since, expected income in coming year is decreasing by $184,000, the action suggested is not desirable.

• Answer (c)

Let the sales volume be ‘x’ number of units, then

200x[Sales] - ($88 x 'x')[Variable cost] - 1134000[Fixed cost] = 254800 [Net Income]

200x - 88x - 1134000 = 254800

112x = 254800 + 1134000

112x = 1388800

x = 1388800 / 112

x = 12400 units = Sale Volume in Unit for desired profit of $254,800