Can I get the step by step methods and explainations? CVP Analysis and Price Cha
ID: 2578191 • Letter: C
Question
Can I get the step by step methods and explainations?
CVP Analysis and Price Changes
(LO 3-1)
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 costs 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
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.
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.
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?
Explanation / Answer
a
If Present level of profit is Maintained
Current profit
Selling price
30
less: Variable cost
-15
Contribution
15
Number of units
60000
Total contribution
900000
Less: Fixed Cost
-700000
200000
Notes:
Labor (15*50%*115%)
8.625
Materials(15*25%*110%)
4.125
Overhead(15*25%*120%)
4.5
17.25
Fixed cost (700000*105%)
735000
Desired profit
(SP-VC)X-FC
200000 =(33-17.25)X-735000
935000 = 15.75 X
X = 935000/15.75
X = 59635
Number of selling units
59365
Total sales value
(59365*30*110%)
1959045
b
If there is 6 percent increase in profit
Target profit
200000*106%
212000
212000 =(33-17.25)X-735000
X =60127
Number of selling units
60127
Total sales value
(60127*30*110%)
1984191
C
If sales volumes remains at 60000 units
212000 = 60000P -(60000*17.25)
P=$33.03
a
If Present level of profit is Maintained
Current profit
Selling price
30
less: Variable cost
-15
Contribution
15
Number of units
60000
Total contribution
900000
Less: Fixed Cost
-700000
200000
Notes:
Labor (15*50%*115%)
8.625
Materials(15*25%*110%)
4.125
Overhead(15*25%*120%)
4.5
17.25
Fixed cost (700000*105%)
735000
Desired profit
(SP-VC)X-FC
200000 =(33-17.25)X-735000
935000 = 15.75 X
X = 935000/15.75
X = 59635
Number of selling units
59365
Total sales value
(59365*30*110%)
1959045
b
If there is 6 percent increase in profit
Target profit
200000*106%
212000
212000 =(33-17.25)X-735000
X =60127
Number of selling units
60127
Total sales value
(60127*30*110%)
1984191
C
If sales volumes remains at 60000 units
212000 = 60000P -(60000*17.25)
P=$33.03
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