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 84,000 units for $70 per unit. The variable production costs are $40, and fixed costs amount to $1,440,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 5 percent in the coming year. Of the $40 variable costs, 50 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 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:

1. 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 84,000 Sales $5,196,000

2. 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. (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 84,000 units, what price change would be required to attain the 6 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)	Volume in units	=	87,081
	Sales	=	$       67,05,243
(b)	Volume in units	=	89,270
	Sales	=	$       68,73,811
(c)	New Price	=	$                78.86
	Workings:
(a)	Current Profit	=	[Units sold X (Selling price - Variable cost)] - Fixed cost
		=	[84,000 units ($70-$40)] - $14,40,000
		=	$       10,80,000
	New Variable cost	=	Labor cost + Material cost + Overheads
		=	(120% X 50% X $40) + (105% X 20% X $40) + (125% X 30% X $40)
		=	$                47.40
	New Selling Price	=	$70 X 110%
		=	$                      77
	New Fixed cost	=	$14,40,000 X 104%
		=	$       14,97,600
	Current Profit	=	[Units sold X (Selling price - Variable cost)] - Fixed cost
	$                     10,80,000	=	[Units sold ($77-$47.40)] - $14,97,600
	Units sold	=	87081
	Sales	=	Units sold X Selling price
		=	87,081 X $77
		=	$       67,05,243
(b)	Profit to be achieved	=	$10,80,000 X 106%
		=	$       11,44,800
	Profit to be achieved	=	[Units sold X (Selling price - Variable cost)] - Fixed cost
	$                     11,44,800	=	[Units sold ($77-$47.40)] - $14,97,600
	Units sold	=	89270
	Sales	=	Units sold X Selling price
		=	89,270 X $77
		=	$       68,73,811
(c)	Profit to be achieved	=	$10,80,000 X 106%
		=	$       12,13,488
	Profit to be achieved	=	[Units sold X (Selling price - Variable cost)] - Fixed cost
	$                     11,44,800	=	[84,000 units (Selling price - $47.40)] - $14,97,600
	Selling Price	=	$                78.86