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 82,000 units for $70 per unit. The variable production costs are $40, and fixed costs amount to $1,420,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 5 percent in the coming year. Of the $40 variable costs, 45 percent are from labor and 25 percent are from materials. Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 5 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 82,000 units, what price change would be required to attain the 6 percent increase in profits? Calculate the new price.

Answer 1

	Current	New
Selling price	70	77
Material Cost	10	10.5
Labor cost	18	20.7
Variable overhead cost	12	14.4
Total variable cost	40	45.6
Contribution Margin per unit	30	31.4
Fixed costs	1420000	1491000
Profit	1040000	1040000
Units required to be sold		80605.09554
Sales Dollars Required		6,206,592.36
b.
For 6% increase, units	82592.35669
Dollars	6,359,611.46
c.Desired Contribution margin per unit	31.62682927
Variable cost per unit	45.6
Desired price	77.22682927

А 1 2 Selling price 3 Material Cost 4 Labor cost 5 Variable overhead cost 6 Total variable cost 7 Contribution Margin per unit 8 Fixed costs 9 Profit 10 Units required to be sold 11 Sales Dollars Required Current 70 =40*25% =40*45% =40-B3-B4 =SUM(B3:B5) =B2-B6 1420000 =82000*B7-B8 New =B2*1.1 =B3*105% =B4*115% =B5*1.2 =SUM(C3:05) =C2-C6 =B8*105% =B9 =(C9+C8)/07 units =C10*C2 12 13 b. 14 For 6% increase, units =(C9*106%+C8)/C7 15 Dollars =B14*C2 16 17 c.Desired Contribution margin per unit =(C9*106%+C8)/82000 18 Variable cost per unit =C6 19 Desired price =SUM(B17:B18)