Presented is the 2012 contribution income statement of Colgate Products. Colgate
ID: 2350296 • Letter: P
Question
Presented is the 2012 contribution income statement of Colgate Products.Colgate Products
Contribution Income Statement
For Year Ended December 31, 2012
Sales (12000 units) $1,440,000
Less variable costs
Cost of goods sold $480,000
Selling and administrative 132,000
Contribution margin 828,000
Less fixed costs
manufacturing overhead 520,000
selling and administrative 210,000
Net income $98,000
During the coming year Colgate expects an increase in variable manufacturing costs of $8 per unit and in fixed manufacturing cost of $48,000.
a. If sales for 2010 remain at 12,000 unites, what price should colgate charge to obtain the same profit as last year?
b. Management believes that sales can be increased to 16,000 units if the selling price is lowered to $107. Is this action desirable?
c. After considering the expected increases in costs, what sales volume is needed to earn a profit of $98,000 with a unit selling price of $107.
Show work.
Explanation / Answer
a. Last year's sale price per unit: 1,440,000/12,000 = $120 per unit Increase in fixed cost per unit: 48,000/12,000 = $4 per unit Increase in variable cost per unit: $8 per unit. They should charge $12 more per unit ($8 + $4) for a total of 120 + 12 = $132 per unit answer: $132 per unit b. 1,712,000 sales -944,000 variable costs -778,000 fixed costs = loss of 10,000. (variable cost per unit: (480,000 + 132,000)/12,000 + 8 = 59. 59*16,000=944,000) (fixed costs = 520,000 + 210,000 + 48,000 = 778,000) answer: No, it's not desirable. They will have a loss of $10,000. c. contribution margin ratio = (107-59)/107 = 0.4486 (778,000 + 98,000)/.4486598 = $1,952,750. If you need units instead of $, divide by 107 to find units of 18250 answer: $1,952,750, which is 18,250 units
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