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 65,000 units for $66 per unit. The variable production costs are $33, and fixed costs amount to $1,300,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 15 percent in the coming year. Of the $33 variable costs, 50 percent are from labor and 25 percent are from materials. Variable overhead costs are expected to increase by 15 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 10 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.
Volume in units
Sales volume $

(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.
Volume of sales in units
Sales volume $

(c)
If the volume of sales were to remain at 65,000 units, what price change would be required to attain the 6 percent increase in profits?

Explanation / Answer

We have SP pu = $66 Less VC pu = $33 ----------------------- So Cont pu = $33 Total Cont = COnt pu * NO of Units = $33 * 65,000 = $2,145,000 Less FC $1300,000 ---------------------------- So Current Profit = $845,000 Since there is a 15% increase in VC for labor, materials & Var OHs in ratio of 50%, 25%, 25%. It means VC pu increased by 15%. So new VC pu = $33 * 1.15 = $37.95 Also 10% inc in FC = $1300,000*1.10 = $1,430,000 (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. Max SP pu increase is 10%. SO new SP pu = $66*1.10 = $72.60 So Cont pu = SP pu - VC pu = $72.60 - 37.95 = 34.65 Now we have Profit + FC = Total Cont ie Total Cont = 1430,000 + 845,000 = $2,275,000 ie COnt PU * No of units = $2,275,000 SO No of units = $2,275,000/34.65 = 65,657 units. DOllar Sales = 65,657 *$72.60 = $4,766,667 (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 New Profit = $845000*1.06 = $895,700 Cont pu = 34.65 Now we have Profit + FC = Total Cont ie Total Cont = 1430,000 + 895,700 = $2,325,700 ie COnt PU * No of units = $2,325,700 SO No of units = $2,325,700 /34.65 = $67,120 units. DOllar Sales = $67,120*$72.60 = $4,872,895 (c)If the volume of sales were to remain at 65,000 units, what price change would be required to attain the 6 percent increase in profits? New Profit = $845000*1.06 = $895,700 Now we have Profit + FC = Total Cont ie Total Cont = 1430,000 + 895,700 = $2,325,700 ie COnt PU * No of units = $2,325,700 SO Cont pu = $2,325,700/No of units = $2,325,700/65000 = $35.78 So SP pu = COnt pu + VC pu = $35.78 + $37.95 = $73.73 So Price change = ($73.73 - $66)/$66 = $7.73/$66 = 11.71%

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