Question

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 61,000 units $35 per unit. The variable production costs are $20, and fixed costs amount to $710,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming year the $20 variable costs, 40 percent are from labor and 20 percent are from materials. Variable overhead costs are expected to incre by 20 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 4 percent as a resu 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 61,000 units, what price increase would be required to attain the 6 percent increase in profits? Calculate the new price,

Answer 1

Answer

	Sale Units	61,000
	Sales Price	35
	Variable Cost :	20
	Labour	8
	Material	4
	Variable O/H	8
	Fixed Cost	710,000
	Present Profit
	Margin = Sale Price - Variable cost
	Margin = 35-20
	Margin = 15
	Units Sold	61000
	Total Margin	`=61000*15	915000
	Fixed cost	710,000
	Profit	205,000

Answer A
	Price increse	New Price
Sales Price	10%	38.5
Variable Cost :	23.2
Labour	15%	9.2
Material	10%	4.4
Variable O/H	20%	9.6
Fixed Cost	4%	738400
Present Profit
Margin = Sale Price - Variable cost
Margin = 38.5-23.2
Margin = 15.3
	Units to be sold = (Fixed Cost + Present Profit)/ margin
	Units to be sold = (738400 + 205000)/ 15.3
Volume	61661
Sales	$   2,158,135

Answer B
	Price increse	New Price
Sales Price	10%	38.5
Variable Cost :		23.2
Labour	15%	9.2
Material	10%	4.4
Variable O/H	20%	9.6
Fixed Cost	4%	738400
Present Profit
Margin = Sale Price - Variable cost
Margin = 38.5-23.2
Margin = 15.3
	Units to be sold = (Fixed Cost + Present Profit*1.06)/ margin
	Units to be sold = (738400 + 205000*1.06)/ 15.3
Volume	62465
Sales	$   2,186,275

Answer C
	Price increse	New Price
Sales Volume = 61000
Sale Price		X
Variable Cost :		23.2
Labour	15%	9.2
Material	10%	4.4
Variable O/H	20%	9.6
Fixed Cost	4%	738400
Units to be sold = (Fixed Cost + Present Profit*1.06)/ (Sale Price - Variable Cost)
61000 = (738400 + 205000*1.06)/ (X-23.2)
X =	$            38.87
Sale Price	$            38.87