Problem 3-39 CVP Analysis and Price Changes (LO 3-1) Scholes Systems supplies a

Question

Problem 3-39 CVP Analysis and Price Changes (LO 3-1) 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 95,000 units for $55 per unit. The variable production costs are $25, and fixed costs amount to $1,550,000. 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 $25 variable costs, 40 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 7 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 10 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. (Round only your intermediate per unit cost calculations to 2 decimal places. Round up your Volume in Units final answer to the nearest whole unit. Round your Sales final answer to the nearest whole dollar.) (b) Compute the volume of sales and the dollar sales level necessary to provide the 10 percent increase in profits, assuming that the maximum price increase is implemented. (Round only your intermediate per unit cost calculations to 2 decimal places. Round up your Volume in Units final answer to the nearest whole unit. Round your Sales final answer to the nearest whole dollar.) (c) If the volume of sales were to remain at 95,000 units, what price change would be required to attain the 10 percent increase in profits? Calculate the new price. (Round your answer to 2 decimal places.)

Explanation / Answer

data is summarized as Units sold 95000 Sales ( at 55 per unit) 5225000 Less: Variable production costs Labor cost ( 40 % of 25 , = 10) 950000 Material cost (30 % of 25 , =7.5) 712500 variable overheads * (30 % of 25 , =7.5) 712500 Total variable cost 2375000 Contribution 2850000 Less: Fixed costs 1550000 Operating Income 1300000 * If Variable labor and material cost is 70 % combined then remaining 30 % is variable overhead It has been said that labor cost per unit will increase by 15 % so labor cost will be = 10 + 15% of 10 = 11.50 Material cost increase by 10 % = 7.5 + 10% of 7.5 = 8.25 Variabe overheads will Increase by 10 % = 7.5 + 20% of 7.5 = 7.5+1.5, = 9.00 Fixed costs will increase by 7 % = 1550000+ 7% of 1550000 1658500 sale price will increase by 10 % = 55 + 10% of 55 = 60.50 Updated data per unit Sales   60.50 Less: Variable production costs Labor cost 11.50 Material cost 8.25 variable overheads 9.00 Total variable cost 28.75 Contribution 31.75 Updated PV Ratio = contribution / sales = 31.75 / 60.50 52.48% a) Desired Sales Level can be calculated as = ( desired profits + fixed costs ) / Pv ratio = (1300000 +1658500) / 52.48 % = 5637386 Volume in units can be caluclated as = Desired sales in Value / selling price = 5637386 / 60.50 = 93180 b) Desired profit = 10 % increase in previous profit = 1300000 + 10 % of 1300000 = 1430000 Desired sales level can be calculated as = ( desired profits + fixed costs ) / Pv ratio = (1430000 +1658500) / 52.48 % = 5885099 Volume in units = 5885099 / 60.50 = 97274 c) Under this condition Total sale value should be = Desired Profit + Variable expense at 95000 units + Fixed cost = 1430000 + 1658500 + 95000(11.50+8.25+9.00) = 1430000 + 1658500 + 95000 (28.75) = 5819750 Now sale price should be = Sale value / sale units = 5819750 / 95000 = 61.26

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