Argentina Partners is concerned about the possible effects of inflation on its o

Question

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 76,000 units for $50 per unit. The variable production costs are $35, and fixed costs amount to $860,000. 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 $35 variable costs, 60 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 6 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.

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. (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.)

(b) Compute the volume of sales and the dollar sales level necessary to provide the 8 percent increase in profits, 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.)

(c) If the volume of sales were to remain at 76,000 units, what price increase would be required to attain the 8 percent increase in profits? Calculate the new price. (Round your answer to 2 decimal places.)

Explanation / Answer

Current Year Sale                                                           3,800,000 Variable Cost                                                           2,660,000 Contribution Margin                                                           1,140,000 Fixed Cost                                                              860,000 Profit                                                              280,000 Current year Sale Price 50*110% 55 Varible Cost 35*60%*120%+35*20%*105%+35*20%*125% 41.3 Contrbution Margin Per unit 13.7 Fixed Cost 860000*106% 911600 Profit Reuired 280000 a Sale Qty (911600+280000)/13.7 =         86,978 Sale Value 86978*55 =    4,783,790 b Profit required 280000*108% =       302,400 Sale Qty (911600+302400)/13.7 =         88,613 Sale Value 88613*55 =    4,873,715 c Sale Qty 76000 Profit required 280000*108% =       302,400 Fixed Cost       911,600 Variable Cost                                                           3,138,800    3,138,800 Sales value    4,352,800 Sales Price per unit 4352800/76000 =           57.27

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.