Question

Serendipity Sound, Inc. manufactures and sells compact discs. Price and cost data are as follows:

  

Selling price per unit (package of two CDs)	$	25.00
Variable costs per unit:
Direct material	$	10.50
Direct labor		5.00
Manufacturing overhead		3.00
Selling expenses		1.30
Total variable costs per unit	$	19.80
Annual fixed costs:
Manufacturing overhead	$	192,000
Selling and administrative		276,000
Total fixed costs	$	468,000
Forecasted annual sales volume (120,000 units)	$	3,000,000

In the following requirements, ignore income taxes.

6. If the company’s direct-labor costs do increase by 8 percent, what selling price per unit of product must it charge to maintain the same contribution-margin ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Calculate the selling price per unit, if the company's direct labor costs increase by 8% but the contribution margin ratio remains the same as under: B Partticulars Old New 2 Selling price per unit 3 Variable cost per unit: 25.00 х 4 Direct material 10.50 S 10.50 5 Direct labor 6 Manufacturing overhead 7 Selling expenses 8 Total variable cost per unit 9 Contribution margin 10 Contributtion margin ratio 5.00 S 3.00 S 5.40 3.00 1.30 S 1.30 19.80 S 20.20 5.20 x - 20.20 0.208 S 0.208 Also, Contribution Contribution margin ratio %3D Sales x - $ 20.20 0.208 = х 0.208 x = x - $ 20.20 x = $ 25.51 Hence, new selling price is $ 25.51 Working note: B Partticulars Old New 2 Selling price per unit 3 Variable cost per unit: 4 Direct material 5 Direct labor 6 Manufacturing overhead 7 Selling expenses 8 Total variable cost per unit =SUM(B4:B7)|=SUM(C4:C7)| 9 Contribution margin 10 Contributtion margin ratio =B9/B2 25 х 10.5 10.5 |=5+8%*5 3 1.3 1.3 =B2-B8 x - 20,20 =B10