Question

Check my work 7 1.11 Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 74,000 units for $40 per unit. The variable production costs are $17, and fixed costs amount to $840,000. 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. Of the $17 variable costs, 50 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 10 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 11 percent during the year points Scoped Book Pin Neces 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 11 percent increase in profits, assuming that the maximum price increase is implemented c. If the volume of sales were to remain at 74,000 units, what price increase would be required to attain the 11 percent increase in profits? Calculate the new price. Complete this question by entering your answers in the tabs below. Required A Required Required Compute the volume in units and the della sales vel necessary to maintain the present profitentuming that the maximum price increase is implemented. (Do not round edition. Round up your answer for Volume in units to the nearest whole number and found your answer to the others were amount

Answer 1

Sale (in units) = 74,000 (Given)

Selling Price =$40 per unit (Given)

Total Sales = 74,000*$40 = $2,960,000

Variable production cost per unit = $17 (Given) in which 25% is direct material and 50 % is Labour cost

Direct Material cost per unit = $17*25% =$4.25

Labour cost per unit = $17*50% = $8.5  

Fixed cost = $840,000 (Given)

Calculation of present profit:-

Particulars	Amount (in $)
Sales (A)	2,960,000
Variable cost (74,000 units*$17)	1,258,000
Fixed cost	840,000
Total cost (B)	2,098,000
Profit (A) - (B)	862,000

After Inflation Effect;

Direct Material cost per unit = $4.25*110% =$4.675

Direct Labour cost per unit = $8.5*115% = $9.775

Variable overhead cost per unit =$4.25*120% = $5.1

Total Variable cost per unit = $4.675 + $9.775 +$5.1 = $19.55

Total Fixed Cost =$840,000*110% = 924,000

Selling Price per unit = $40*110% =$44

Contribution margin per unit = Selling price per unit -Total variable cost per unit

= $44 -$19.55 =$24.45

a.) For calculating the number of units by maintaining same level of profit calculate break even point

Break even point (in units) = (Fixed cost + Present Profit)/ Contribution margin

=($924,000 + $862,000) / $24.45

=$1,786,000 / $24.45

= 73,047 units

Sales = 73,047 units *44 = $3,214,068

73,047 units and sale of $3,214,068 necessary to maintain the present level of profit.

b.) In the second situation the profit must increase by 11%

Required Profit = $862,000*111% = $956,820

Break Even Point (in units) = (Fixed cost + Required Profit)/ Contribution margin

= ($924,000 + $956,820) / $24.45

= $1,880,820 / $24.45

= 76,925 units

Sales = 76,925 units *44 = $3,384,700

73,047 units and sale of $3,214,068 necessary to provide the 11% increase in profit.

c.) Let x be the selling price which would be required to attain 11% profit.

Sales Quantity = 74,000 units; Required Profit = $956,820

Break Even Point (in units) = (Fixed cost + Required Profit)/ Contribution margin

    74,000   = ($924,000 + $956,820) / (x-$19.55)

74,000 = $1,880,820 / (x-$19.55)

x-$19.55 = $1,880,820 / 74,000

x = $25.412 +$19.55

x = $44.97