Question

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 79,000 units for $30 per unit. The variable production costs are $15, and fixed costs amount to $890,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 15 percent in the coming year. Of the $15 variable costs, 40 percent are from labor and 20 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 7 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 8 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. (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: _____________

b. Compute the volume of sales and the dollar sales level necessary to provide the 8 percent increase in profits, 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: _____________

c. If the volume of sales were to remain at 79,000 units, what price increase would be required to attain the 8 percent increase in profits? Calculate the new price. (Round your answer to 2 decimal places.)

New price: _____________

Answer 1

		Present Scenrio:		Proposed
		Sales Price	30.00	33.00
		VCs:
		MC	3.00	3.45
		Labor	6.00	7.20
		VOH	6.00	7.50
		CM	15.00	14.85		18.15
		FC	890000	9,52,300
		CM Ratio	50.00%	45.00%
		NOI	295000
	A	Desired Income	295000
		Add: FC	9,52,300
		Total CM	1247300
		CM Ratio	45.00%
		Sales in Volume	2771778
		SP PU	33
		Sales in Units	83994
	B	Desired Income	318600	(+8% Increase)
		Add: FC	9,52,300
		Total CM	1270900
		CM Ratio	45.00%
		Sales in Volume	2824222
		SP PU	33.00
		Sales in Units	85583
	C	Desired Income	3,18,600	(+8% Increase)
		Add: FC	9,52,300
		Total CM	12,70,900
		VC of 79000 Units	14,33,850	(79000*18.15)
		Total Sales	2704750
		Volume	79000
		Sales PU	34.24