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Scholes Systems supplies a particular type of office chair to large retailers such as Target, Costco,...

Scholes Systems supplies a particular type of office chair to large retailers such as Target, Costco, and Office Max. Scholes is concerned about the possible effects of inflation on its operations. Presently, the company sells 96,000 units for $60 per unit. The variable production costs are $30, and fixed costs amount to $1,560,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 5 percent in the coming year. Of the $30 variable costs, 60 percent are from labor and 20 percent are from materials. Variable overhead costs are expected to increase by 25 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 6 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 7 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. (Do not round intermediate calculations. Round up your answer for "Volume in units" to the nearest whole number and round your answer for "Sales" to the nearest whole dollar amount.)

Volume in units ?

Sales ?

b. Compute the volume of sales and the dollar sales level necessary to provide the 7 percent increase in profits, assuming that the maximum price increase is implemented. (Do not round intermediate calculations. Round up your answer for "Volume in units" to the nearest whole number and round your answer for "Sales" to the nearest whole dollar amount.)

Volume in units ?

Sales ?

c. If the volume of sales were to remain at 96,000 units, what price change would be required to attain the 7 percent increase in profits? Calculate the new price. (Round intermediate calculations of unit cost and final answer to 2 decimal places.)

New price ?

Business   Accounting   
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Homework Answers

Answer #1

Current Year Income Statement

1.Sales ( 96000 * 60 ) 5760000
Variable Costs
Material [ 96000 * (30*20%) ] 576000
Labour [ 96000 * (30*60%) ] 1728000
Overhead Variable Costs [ 96000 * (30*20%) ] 576000
2.Total Variable Costs 2880000
3. Fixed Cost 1560000
Present Profit (1 - 2 - 3) 1320000

a.Next Year Income Statement

Let us assume the required volume in units is denoted by s.

1.Sales [ s * (60*1.10 ) ] (increase by 10%) 66s
Variable Costs
Material [ s * (6 * 1.05) ] (increase by 5%) 6.3s
Labour [ s * (18 * 1.2) ] (increase by 20%) 21.6s
Overhead Variable Costs [ s * (6*1.25) ] (increase by 25%) 7.5s
2.Total Variable Costs 35.4s
3. Fixed Cost (1560000 * 1.06) (increase by 6%) 1653600
Present Profit (1 - 2 - 3) 1320000

Contribution = 1320000 + 1653600 = 2973600

2973600 = 66s - 35.4s = 30.6s

s = 97176.47 or 97176 units

Dollar sales Level = 97176 * 66 = 6413616

b. Next year Income Statement

1.Sales [ s * (60*1.10 ) ] (increase by 10%) 66s
Variable Costs
Material [ s * (6 * 1.05) ] (increase by 5%) 6.3s
Labour [ s * (18 * 1.2) ] (increase by 20%) 21.6s
Overhead Variable Costs [ s * (6*1.25) ] (increase by 25%) 7.5s
2.Total Variable Costs 35.4s
3. Fixed Cost (1560000 * 1.06) (increase by 6%) 1653600
Present Profit (1320000 * 1.07) (increase by 7%) 1412400

Contribution = 1412400 + 1653600 = 3066000

3066000 = 66s - 35.4s = 30.6s

s = 100196.078 or 100196 units

Dollar sales Level = 100196 * 66 = 6612936

c. Next year Income Statement

Let us assume the new price be p.

1.Sales ( 96000 * p ) 96000p
Variable Costs
Material [ 96000 * (6 * 1.05) ] (increase by 5%) 604800
Labour [ 96000 * (18 * 1.2) ] (increase by 20%) 2073600
Overhead Variable Costs [ 96000 * (6*1.25) ] (increase by 25%) 720000
2.Total Variable Costs 3398400
3. Fixed Cost (1560000 * 1.06) (increase by 6%) 1653600
Present Profit (1320000 * 1.07) (increase by 7%) 1412400

Contribution = 1412400 + 1653600 = 3066000

3066000 = 96000p - 3398400

6464400 = 96000p

p = 6464400/96000 = 67.3375 or 67.34

Price change = (67.34-60) / 60 = 12.23%

Sales price = 96000 * 67.34 = 6464640

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