Question

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 63,000 units for $45 per unit. The variable production costs are $30, and fixed costs amount to $730,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 10 percent in the coming year. Of the $30 variable costs, 50 percent are from labor and 30 percent are from materials. Variable overhead costs are expected to increase by 25 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. The company wishes to maintain the same level of profit in real dollar terms. It is expected that to accomplish this objective, profits must increase by 6 percent during the year. 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. 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. c. If the volume of sales were to remain at 63,000 units, what price increase would be required to attain the 6 percent increase in profits? Calculate the new price. Complete this question by entering your answers in the tabs below. Required A Required B Required C 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.) Volume in units Sales

Answer 1

Answer to Part a:

	Particulars		Present year	Notes	Coming Year	Putting Quantity in Coming year
			(Amount $)		(Amount $)	(Amount $)
1	Sales revenue (63000units*$45)		2835000	Let Quantity be 'x' units	49.5*x	3210570
2	Variable Cost (63000units*$30)		1890000	As per note 1	2230200	2230200
3=(1-2)	Contribution		945000		49.5x-2230200	980370
4	Fixed Costs		730000	As per note 3	759200	759200
5=(4-3)	Profits		215000		49.5x-2230200-759200	221170
	Profit level per unit (profits/63000)		3.41			3.41
				Equating profits with profit level. Quantity is	64860
Note 1	It is given that variable cost is 50% labour cost, 30% material cost and balance is variable over head. Therefore, break up of variable cost in present situation is as below. Further, there is a rise in all the 3 given costs as 20%, 10% and 25% respectively.
			Present year	Notes	Coming year
	50% labour cost		945000	Increase by 20%	1134000
	30% material cost		567000	Increase by 10%	623700
	20% variable overhaed		378000	Increase by 25%	472500
	Total Variable cost		1890000		2230200
Note 2	It is given that sales prices cannot increase more than 10%
	Present sales price		45
	Proposed in coming year (increase by 10%)		49.5
Note 3	It is given that Fixed cost will rise by 4%
	Current Fixed cost		730000
	Proposed in coming year (increase by 4%)		759200

Therefore,
Volume in units	64860
Sales	3210570

Answer to part b:

	Particulars	Notes	Coming Year	Putting Quantity in Coming year
			(Amount $)	(Amount $)
1	Sales revenue	Let Quantity be 'x' units	49.5*x	3217302
2	Variable Cost	As per note 1	2230200	2230200
3=(1-2)	Contribution		49.5x-2230200	987102
4	Fixed Costs	As per note 3	759200	759200
5=(4-3)	Profits	6% increase in profits basis present year (given)	227900	227902
	Profit level per unit (profits/63000)
		Equating profits with profit level. Quantity is	64996
		Therefore,
		Volume in units	64996
		Sales	3217302

Answer part c:

	Particulars	Present year	Notes	Notes	Coming Year	Putting Quantity in Coming year
		(Amount $)
1	Sales revenue (63000units*$45)	2835000	Let Quantity be 'x' units	Let sale price be $ x	63000x	3230974
2	Variable Cost (63000units*$30)	1890000	As per note 1	As per note 1	2230200	2230200
3=(1-2)	Contribution	945000			63000x-2230200	1000774
4	Fixed Costs	730000	As per note 3	As per note 3	759200	759200
5=(4-3)	Profits	215000	6% increase in profits basis present year (given)	6% increase in profits basis present year (given)	241574	241574
	Profit level per unit (profits/63000)	3.41
				Equating profits with profit level. New price is	51