Question

Product Pricing: Single Product
Presented is the 2014 contribution income statement of Colgate Products.

COLGATE PRODUCTS Contribution Income Statement For Year Ended December 31, 2014
Sales (13,000 units)		$ 1,560,000
Less variable costs
Cost of goods sold	$ 520,000
Selling and administrative	143,000	(663,000)
Contribution margin		897,000
Less fixed costs
Manufacturing overhead	520,000
Selling and administrative	210,000	(730,000)
Net income		$ 167,000

During the coming year, Colgate expects an increase in variable manufacturing costs of $8 per unit and in fixed manufacturing costs of $35,000.

(a) If sales for 2015 remain at 13,000 units, what price should Colgate charge to obtain the same profit as last year? Round to the nearest cent.
$Answer

(b) Management believes that sales can be increased to 16,000 units if the selling price is lowered to $107. 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 profit of $167,000 with a unit selling price of $107? Round to the nearest uni

Answer 1

Variable manufacturing cost per unit in 2014 = 520,000/13,000

= $40

Variable selling and administrative cost per unit in 2014 = 143,000/13,000

= $11

During 2015, Colgate expects an increase in variable manufacturing costs of $8 per unit and in fixed manufacturing costs of $35,000.

Hence, Variable manufacturing cost per unit in 2015 = 40 + 8

= $48

Hence, Fixed manufacturing cost in 2015 = 520,000 + 35,000

= $555,000

Variable cost per unit in 2015 = Variable manufacturing cost per unit + Variable selling and administrative cost per unit

= 48 + 11

= $59

Total fixed costs in 2015 = Fixed manufacturing cost in 2015 + Fixed selling and administrative cost

= 555,000 + 210,000

= $765,000

(a)

Let the selling price per unit be $Y

Profit = Sales - Variable cost - Fixed cost

167,000 = 13,000Y - (13,000 x 59) - 765,000

13,000Y = 1,699,000

Y = $130.7

Hence, selling price to be charged = $130.7

(b)

Management believes that sales can be increased to 16,000 units if the selling price is lowered to $107.

Profit = Sales - Variable cost - Fixed cost

= (16,000 x 107) - (16,000 x 59) - 765,000

= 1,712,000 - 944,000 - 765,000

= $3,000

(c)

Let the sales volume be Y units

Profit = Sales - Variable cost - Fixed cost

167,000 = 107Y - 59Y - 765,000

48Y = 932,000

Y = 19,417

Hence, sales volume needed = 19,417 units

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