Scholes Systems supplies a particular type of office chair to large retailers su

Question

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 92,000 units for $80 per unit. The variable production costs are $45, and fixed costs amount to $1,520,000. 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 $45 variable costs, 60 percent are from labor and 30 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 4 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. (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.)

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. (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.)

c. If the volume of sales were to remain at 92,000 units, what price change would be required to attain the 6 percent increase in profits? Calculate the new price. (Round intermediate calculations of unit cost and final answer to 2 decimal places.)

Explanation / Answer

Calculation of New values after percentage increase Particulars Old Values Percentage increase New values Calculation Selling price per unit 80 10% 88 80*110% Labor cost per unit 27 15% 31.05 27*115% 45 Material cost per unit 13.5 10% 14.85 13.5*110% Overheads per unit 4.5 20% 5.4 4.5*120% Contribution per unit 36.7 88 - 31.05 - 14.85 - 5.4 Fixed Costs 1520000 4% 1580800 1520000*4% Profit 1700000 Answer to part 1 Total Contribution 3280800 1580800+1700000 Contribution per unit 36.7 Volume in units 89395 3280800/36.7 Sales 7866768 89395*88 Answer to part 2 Current profit 1700000 Add: Percentage Increase 102000 1700000*6% Proposed Profit 1802000 1700000+102000 Fixed Costs 1520000 4% 1580800 1520000*4% Total contribution 3382800 1802000+1580800 Contribution per unit 36.7 Volume in units           92,174 3382800/36.7 Sales 8111346 92174*88 Answer to part 3 Current profit 1700000 Add: Percentage Increase 102000 1700000*6% Proposed Profit 1802000 1700000+102000 Fixed Costs 1520000 4% 1580800 1520000*4% Total contribution 3382800 1802000+1580800 Number of units 92000 Contribution per unit 36.77 Variable cost per unit 51.3 31.05+14.85+5.4 Selling price per unit_New 88.07 36.77+51.3 Selling price per unit_Old 80 Percentage change 10.09% ((88.07-80)/80)*100 Selling price per unit_New 88.07

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