Question

ABC Inc. manufactures and sells toys.
Price and cost data are as follows:

Selling price per unit (package of 2 CDs)......................................	$27.00
Variable costs per unit:
Direct material...............................................................................................................	$6.00
Direct labor......................................................................................................................	$6.00
Artist's royalties..............................................................................................................	$4.50
Manufacturing overhead..........................................................................................	$4.00
Selling expenses............................................................................................................	$1.00
Total variable costs per unit............................................................	$21.50
Annual fixed costs:
Manufacturing overhead..........................................................................................	$190,000
Selling and administrative.......................................................................................	$300,000
Total fixed costs................................................................................	$490,000
Forecasted annual sales volume (120,000 units).........................	$3,240,000

If the company's direct-labor costs do increase by 8%, what selling price per unit of product must it charge to maintain the same contribution margin ratio?

(Please indicate your result with one decimal place. Example: 40.5)

Answer 1

Contribution margin ratio = Contribution margin per unit / Selling Price

Contribution margin per unit = Selling Price - Variable cost per unit

= $27.00 - $21.50

= $5.50

Contribution margin ratio = $5.50 / $27.00

= 20.4%

If direct labor cost increases by 8%.

New direct labor cost = $6.00 * 1.08

= $6.48

New variable cost per unit = Direct material + Direct labor + Artist's royalties + Manufacturing overhead + Selling expenses

= $6.00 + $6.48 + $4.50 + $4.00 + $1.00

= $21.98

Let selling price = x

Contribution margin ratio = (Contribution margin per unit / Selling Price)

Contribution margin ratio = (Selling price - Variable cost) / Selling price

0.204 = (x - $21.98) / x

0.204 x = x - $21.98

$21.98 = x - 0.204 x

$21.98 = 0.796 x

x = $27.6

Selling price = $27.6