Question

Scholes Systems supplies a particular type of office chair to large retailers such as Target, Costco, and Office Max. Scholes is concerned about the possible effects of inflation on its operations. Presently, the company sells 86,000 units for $50 per unit. The variable production costs are $20, and fixed costs amount to $1,460,000. 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 $20 variable costs, 45 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 6 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 7 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 7 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 86,000 units, what price change would be required to attain the 7 percent increase in profits? Calculate the new price. (Round intermediate calculations of unit cost and final answer to 2 decimal places.)

NEW PRICE==========

Answer 1

a. Sales Volume (units)= 85913(see note below)

Sales(dollars) =$ 47,25,217(see note below)

NOTE:

Particulars	Existing	Proposed
Selling Price per unit	$ 50	$ 55
Less: Direct Materials per unit	$ 6	$ 6.9(increase by 15%)
Less: Direct Labor per unit	$ 9	$10.8(increase by 20%)
Less: Variable overhead	$ 5	$ 6.25(increase by 25%)
Contribution per unit	$30	$ 31.05
Number of units	86000	85913 ($2667600/31.05)
Total Contribution	$25,80,000	$26,67,600
Less: Fixed Costs	$14,60,000	$15,47,600(increase by 6%)
Profit	$11,20,000	$11,20,000

Variable cost=$ 20 per unit is detailed as follows:

Direct Material(30%)      $6

Labour(45%)                    $9

Variable overhead(25%)$5

b. Sales Volume (units)= 88438 (see note below)

Sales(dollars) =$ 48,64,090(see note below)

NOTE:

Particulars	Existing	Proposed
Selling Price per unit	$ 50	$ 55
Less: Direct Materials per unit	$ 6	$ 6.9(increase by 15%)
Less: Direct Labor per unit	$ 9	$10.8(increase by 20%)
Less: Variable overhead	$ 5	$ 6.25(increase by 25%)
Contribution per unit	$30	$ 31.05
Number of units	86000	88438
Total Contribution	$25,80,000	$27,46,000
Less: Fixed Costs	$14,60,000	$15,47,600(increase by 6%)
Profit	$11,20,000	$11,98,400(increase by 7%)

c. The New Price =$ 55.880 per unit(see note below)

NOTE:

Particulars	Existing	Proposed
Selling Price per unit	$ 50	$ 55.880
Less: Direct Materials per unit	$ 6	$ 6.9(increase by 15%)
Less: Direct Labor per unit	$ 9	$10.8(increase by 20%)
Less: Variable overhead	$ 5	$ 6.25(increase by 25%)
Contribution per unit	$30	$ 31.930
Number of units	86000	86000
Total Contribution	$25,80,000	$27,46,000
Less: Fixed Costs	$14,60,000	$15,47,600(increase by 6%)
Profit	$11,20,000	$11,98,400(increase by 7%)