Argentina Partners is concerned about the possible effects of inflation on its o
ID: 2420365 • Letter: A
Question
Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 64,000 units for $50 per unit. The variable production costs are $30, and fixed costs amount to $740,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 5 percent in the coming year. Of the $30 variable costs, 50 percent are from labor and 20 percent are from materials. Variable overhead costs are expected to increase by 25 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 8 percent during the year.
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.)
Units in Volume =
Sales =
Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 64,000 units for $50 per unit. The variable production costs are $30, and fixed costs amount to $740,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 5 percent in the coming year. Of the $30 variable costs, 50 percent are from labor and 20 percent are from materials. Variable overhead costs are expected to increase by 25 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 8 percent during the year.
Explanation / Answer
New Fixed Cost =740000*1.07 = 791800
New Profit = 540000
New Contribution = 791800 + 540000 = 1331800
New Variable Cost per unit = (30*50%)*1.20 + (30*20%)*1.05 + (30-15-6)*1.25 = 35.55
New Sale Price per unit = 50*1.10 = 55
New Units = Total New Contribution/ New Contribution per unit
= 1331800/(55 - 35.55)
= 68473 Units
Sales 3200000 3766015 Less Variable Cost 1920000 2434215 Contribution Margin 1280000 1331800 Less Direct Fixed Expenses 740000 791800 Net Profit 540000 540000Related Questions
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