Question

#1 Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 60,000 units for $30 per unit. The variable production costs are $15, and fixed costs amount to $700,000. 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 $15 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 5 percent as a result of increased taxes and other miscellaneous fixed charges. The company wishes to maintain the same level of profi t in real dollar terms. It is expected that to accomplish this objective, profi ts 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 60,000 units, what price increase would be required to attain the 6 percent increase in profits? #2 Alameda Tile sells products to many people remodeling their homes and thinks that they could profitably offer courses on tile installation, which might also increase the demand for their products. The basic installation course has the following (tentative) price and cost characteristics: Tuition . . . . . . . . . . . . . . . . . . . . . . . $ 400 per student Variable costs (tiles, supplies, and so on) . . . . . . 240 per student Fixed costs (advertising, salaries, and so on) . . . . . . . . . . . 80,000 per year Required a. What enrollment will enable Alameda Tile to break even? b. How many students will enable Alameda Tile to make an operating profit of $40,000 for the year? c. Assume that the projected enrollment for the year is 800 students for each of the following (considered independently): 1. What will be the operating profit (for 800 students)? 2. What would be the operating profit if the tuition per student (that is, sales price) decreased by 10 percent? Increased by 20 percent? 3. What would be the operating profit if variable costs per student decreased by 10 percent? Increased by 20 percent? 4. Suppose that fixed costs for the year are 10 percent lower than projected, whereas variable costs per student are 10 percent higher than projected. What would be the operating profit for the year?

Answer 1

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Argentina Partners
Present Income Statement
Sell price	30.00
Variable production costs	15.00
Contribution margin	15.00
Units sold	60,000.00
Contribution	900,000.00
Fixed costs	700,000.00
Operating Profit	200,000.00

Breakup of Variable production costs
Variable production costs	15.00
50 percent are labor	7.50	50% of $ 15
25 percent are materials	3.75	25% of $ 15
25 percent are Variable overhead	3.75	25% of $ 15

Revised situation	Present	Increase	Revised
Sell price	30.00	10%	33.00
Labor	7.50	15%	8.63
Materials	3.75	10%	4.13
Variable overhead	3.75	20%	4.50
Contribution margin	15.00		15.75
Contribution margin ratio			47.73%	It is Contribution margin/ Sell Price
Fixed costs	700,000.00	5%	735,000.00
Operating Profit	200,000.00	6%	212,000.00

Answer to requirement a			Answer to requirement b			Answer to requirement c
Operating Profit required	200,000.00	A	Operating Profit required	212,000.00	H	Operating Profit required	212,000.00	H
Fixed costs	735,000.00	B	Fixed costs	735,000.00	B	Fixed costs	735,000.00	B
Target Contribution	935,000.00	C=A+B	Target Contribution	947,000.00	C=H+B	Target Contribution	947,000.00	C=H+B
Contribution margin	15.75	D	Contribution margin	15.75	D	Contribution margin ratio	47.73%	I
Volume in units	59,365.08	E=C/D	Volume in units	60,126.98	E=C/D	Dollar sales level	1,984,190.48	J=C/I
Sell price	33.00	F	Sell price	33.00	F	Volume in units	60,000.00	K
Dollar sales level	1,959,047.62	G=E*F	Dollar sales level	1,984,190.48	G=E*F	Sell price	33.07	L=J/K

Alameda Tiles
Answer to requirement a			Answer to requirement b
Calculation of breakeven students			If target profit is $ 40,000.
Tuition fess per student	400.00		Target Profit required	40,000.00
Variable costs per student	240.00		Fixed costs	80,000.00
Contribution margin per student	160.00		Target Contribution	120,000.00
Fixed costs	80,000.00		Contribution margin per student	160.00
Breakeven students	500.00		Number of students	750.00

Answer to requirement c_1
Calculation of operating profits
Tuition fess per student	400.00
Variable costs per student	240.00
Contribution margin per student	160.00
Number of students	800.00
Contribution amount	128,000.00
Fixed costs	80,000.00
Operating profits	48,000.00

Answer to requirement c_2
If Tuition fess decrease by 10%			If Tuition fess Increase by 20%
Tuition fess per student	400.00		Tuition fess per student	400.00
Decrease by 10%	40.00		Increase by 20%	80.00
Revised Tuition fess per student	360.00		Revised Tuition fess per student	480.00
Variable costs per student	240.00		Variable costs per student	240.00
Contribution margin per student	120.00		Contribution margin per student	240.00
Number of students	800.00		Number of students	800.00
Contribution amount	96,000.00		Contribution amount	192,000.00
Fixed costs	80,000.00		Fixed costs	80,000.00
Operating profits	16,000.00		Operating profits	112,000.00

Answer to requirement c_3
If Variable costs decrease by 10%			If Variable costs Increase by 20%
Variable costs per student	240.00		Variable costs per student	240.00
Decrease by 10%	24.00		Increase by 20%	48.00
Revised Variable costs per student	216.00		Revised Variable costs per student	288.00
Calculation of operating profits			Calculation of operating profits
Tuition fess per student	400.00		Tuition fess per student	400.00
Variable costs per student	216.00		Variable costs per student	288.00
Contribution margin per student	184.00		Contribution margin per student	112.00
Number of students	800.00		Number of students	800.00
Contribution amount	147,200.00		Contribution amount	89,600.00
Fixed costs	80,000.00		Fixed costs	80,000.00
Operating profits	67,200.00		Operating profits	9,600.00

Answer to requirement c_4
If Variable costs Increase by 10% and Fixed cots decrease by 10%
Variable costs per student	240.00
Increase by 10%	24.00
Revised Variable costs per student	264.00
Fixed costs	80,000.00
Decrease by 10%	8,000.00
Revised Fixed costs	72,000.00
Calculation of operating profits
Tuition fess per student	400.00
Variable costs per student	264.00
Contribution margin per student	136.00
Number of students	800.00
Contribution amount	108,800.00
Fixed costs	72,000.00
Operating profits	36,800.00