Question

Pharoah Company produces a molded briefcase that is distributed to luggage stores. The following operating data for the current year has been accumulated for planning purposes. Sales price $41.17 Variable cost of goods sold 13.17 Variable selling expenses 11.77 Variable administrative expenses 4.17 Annual fixed expenses Overhead $14,040,000 Selling expenses 2,790,000 Administrative expenses 5,850,000 Pharoah can produce 2,700,000 cases a year. The projected net income for the coming year is expected to be $3,240,000. Pharoah is subject to a 40% income tax rate. During the planning sessions, Pharoah’s managers have been reviewing costs and expenses. They estimate that the company’s variable cost of goods sold will increase 15% in the coming year and that fixed administrative expenses will increase by $270,000. All other costs and expenses are expected to remain the same. Calculate contribution margin per unit for the coming year. (Round contribution margin per unit to 2 decimal places, e.g. 0.38.) Contribution margin per unit $ What amount of sales revenue will Pharoah need to achieve in the coming year to earn the projected net income of $3,240,000? (Use the rounded contribution margin per unit calculated in the previous part to compute Sales Revenue. Round answer to 0 decimal places, e.g. 25,000.) Sales revenue $ What price would Pharoah need to charge for the briefcase in the coming year to maintain the current year’s contribution margin ratio? (Round ratio to 0 decimal places, e.g. 25%. Round per unit answer to 2 decimal places, e.g. 0.38.) Price $

Answer 1

1.

contribution margin per unit = sales per unit-variable cost per unit

variable cost of goods sold	$15.15[$13.17*115%]
variable selling expenses	$11.77
Variable administrative	$4.17
Total variable expenses	$31.09

Contribution margin per unit= sales-variable cost

=$41.17-$31.09

=$10.08

2. projected net income before tax =$3,240,000/60%

=$5,400,000

sales = (net income+fixed expenses)/Contribution margin per unit

=($5,400,000+$14,040,000+$2,790,000+$5,850,000+$270,000 increase)/$10.08

=2,812,500 cases

Revenue= 2,812,500*$41.17

=$115,790,625

3) Current year CM ratio

=CM/sales*100

CM=($41.17-$13.17-$11.77-$4.17)

CM ratio=$12.06/$41.17 *100

=29%

Suppose the sales price is X

0.29 =(X-$31.09) /X

0.29X =X-31.09

0.71X=31.09

X=$43.79

Thus, sales price is $43.79 per brief case

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