Question

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 77,000 units for $55 per unit. The variable production costs are $36, and fixed costs amount to $870,000. 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 $36 variable costs, 50 percent are from labor and 25 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 5 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 5 percent increase in profits, assuming that the maximum price increase is implemented.

c. If the volume of sales were to remain at 77,000 units, what price increase would be required to attain the 5 percent increase in profits? Calculate the new price.

Answer 1

based on given information wee found out expected prices in labour, material, overheads, fixed costs and maximum price that can be increasedAnswer to part a) volume 86,579 units, sales value $5,238,030

Page No. Date WNI: Based on given information. Poresent variable costs Direct labour Expected. $21-6 (918 * 1207.) $10.35 (39x1157) Direct material Overhead se 89 $11.25 ($ 9X 125 %) $43.20. vasiable Panduction costs. p.U. Fixed Costs $690.000 $904 200 (5870000 X1042) 1) Selling prices $55 $60.5 (maximum price) Present Situatias selling price pv = $55 p.U variable costs PU = ($ 3621) $19 p.U Total contribution - 71000wils x $29 = $ 14,63.000. a fixed costs - $(670,000 Present Profit

Answer to part b) volume 88,292 units. sales value $5,341,666

Answer to part c) price will be $63.04

Page No. Date computation necessary that the of volume to maintain maximum in units and dollars sales the present profit level, assuming price increase is implemented. present profit - + Expected fixed costs : Total Expected contribution = $593,000 $ 904,800 $ 14,97,800 Supected contribution. p.u = $60.5- $43.20 = $123 pke * Expected volume = Total contribution contributionpu - $14,97,800 $17.3 = 06579 units Cranded off) * Expected sales & & 86579 units * $60.5 = $ 5238030 (Romded off 16 compute I necessary that the the volume of sales and the to provide the 5% increase maximum price increase is dollar sales level in profits, assuming implemented. ming Expected Profft = $593000, X1D5%. $ 622,650. + Expected Fined Costs - $904,000 Total Expected contribution = $ 1527 uso expected contribution p. v= $60.5 - $43.20 = $17.3p. v * Expected volume = Total contribution contribution pu & 1,527,450 - 88 292 units $17.3pu (Ronded off) X boxpected sales - 88292 mits * $ 60.5 = $ 5,341, 666

Page No. Date If the volume of sales were to remain at 77,000 units. What price increases would be required to attain the 51 I increases in profits - let x' be selling price pu - Total contribution - Fixed costs = Profit (2- $43-20 ) 37,000 - $904,800 = $622,650 12- $43.20 1 97000 9 622 650 + $ 904 800 x- $43.20 = $1,527 450 x .-$43.20 = $ 1527450 77000 x- $43.20 = $ 19.84 x= $19.84 + $43.20 2= $63.04 CRESTER Price Increase Required = $63.04.