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Homework answers / question archive / Argentina Partners is concerned about the possible effects of inflation on its operations
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 cost 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 profit in real dollar terms. It is expected that to accomplish this objective profits 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?
Answer:
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.
Existing Profit
Sales 60,000 x $30 $1,800,000
Less : Variable costs
Direct materials $15x0.25x60,000 $225,000
Direct labor $15x0.50x60,000 $450,000
Variable OH $15x0.25x60,000 $225,000
Total Variable costs $15 x 60,000 $900,000
Contribution Margin $15 x 60,000 $900,000
Less : Fixed costs $700,000
Net profit $200,000
Revised Sale price per unit $30 x 1.1 $33.00
Revised Variable costs after increase
DM $15 x 0.25 x 1.10 $4.125
DL $15 x 0.50 x 1.15 $8.625
VOH $15 x 0.25 x 1.20 $4.500 $17.25
Contribution Margin $15.75
Desired Sales Volume(units) ($700,000 x 1.05) + $200,000 / $15.75
=59,365 units
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.
Desired profit $200,000 x 1.06 = $212,000
Desired Sales Volume(units) ($700,000 x 1.05) + $212,000 / $15.75
= 60,127 units
Desired Dollar sales = 60,127 x $33 = $1,984,191
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?
Variable costs 60,000 x $17.25 $1,035,000
Fixed costs $700,000 x 1.05 $735,000
Desired profit $200,000 x 1.06 $212,000
Total Sales $1,982,000
Unit sales price $1,982,000 / 60,000 = $33.03
approx 10.1% increase
