Product Pricing: Single Product Presented is the 2009 contribution income statem

Question

Product Pricing: Single Product
Presented is the 2009 contribution income statement of Colgate Products.

During the coming year, Colgate expects an increase in variable manufacturing costs of $6 per unit and in fixed manufacturing costs of $72,000.

(a) If sales for 2010 remain at 18,000 units, what price should Colgate charge to obtain the same profit as last year?
$Answer

(b) Management believes that sales can be increased to 24,000 units if the selling price is lowered to $105. What would be the excepted profit (or loss) as a result of this action? Use a negative sign with your answer, if appropriate.
Answer

(c) After considering the expected increases in costs, what sales volume is needed to earn a profit of $132,000 with a unit selling price of $105?
Answer units

COLGATE PRODUCTS
Contribution Income Statement
For Year Ended December 31, 2009 Sales (18,000 units) $2,160,000 Less variable costs Cost of goods sold $720,000 Selling and administrative 198,000 (918,000) Contribution margin 1,242,000 Less fixed costs Manufacturing overhead 770,000 Selling and administrative 340,000 (1,110,000) Net income $132,000

Explanation / Answer

(a) If sales for 2010 remain at 18,000 units, what price should Colgate charge to obtain the same profit as last year?

Price should Colgate charge to obtain the same profit = Last year Price + increase in variable manufacturing costs + increase in fixed manufacturing costs / Expected no of Unit to be sold

Price should Colgate charge to obtain the same profit = 2160000/18000 + 6 + 72000/18000

Price should Colgate charge to obtain the same profit = 130

(b) Management believes that sales can be increased to 24,000 units if the selling price is lowered to $105. What would be the excepted profit (or loss) as a result of this action? Use a negative sign with your answer, if appropriate.

Expected profit (or loss) as a result of this action = -30000

(c) After considering the expected increases in costs, what sales volume is needed to earn a profit of $132,000 with a unit selling price of $105?

Variable cost per unit = (720000/18000 + 6 + 198000/18000) = 57

Total Fixed Cost = (770000 + 72000 + 340000) = 1182000

Sales volume is needed to earn a profit of $132,000 = (Total Fixed Cost+Target Profit)/(Sellprice - variable cost per unit)

Sales volume is needed to earn a profit of $132,000 = (1182000+132000)/(105-57)

Sales volume is needed to earn a profit of $132,000 = 27,375

COLGATE PRODUCTS Contribution Income Statement Sales (24,000 units) $2,520,000 Less variable costs Cost of goods sold $1,104,000 Selling and administrative 264,000 -1,368,000 Contribution margin 1,152,000 Less fixed costs Manufacturing overhead 842,000 Selling and administrative 340,000 -1,182,000 Net income -30000.00

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