a.
Compute the volume in units and the dollar sales level necessary to maintain the present profit level of Company S; assuming that the maximum price increase is implemented.
a.
Answer to Problem 49P
The target volume is 78,413 and target dollar sales are $5,175,258 at the current level of profit.
Explanation of Solution
Target volume: the level of sales which need to be achieved during a particular period of time is termed as target volume.
Target profit: the amount of profit which needs to be achieved during a particular period of time on a particular level of sales is termed as target profit.
Compute the volume in units and the dollar sales level necessary to maintain the present profit level of Company S; assuming that the maximum price increase is implemented:
Compute the target volume at the current level of profit:
Thus, the target volume is 78,413 and target dollar sales are $5,175,258 at the current level of profit.
Working note 1:
Compute the current level of profit:
Working note 2:
Compute the revised variable cost:
Sales price is expected to increase by not more than 10%.
Working note 3:
Compute the revised fixed cost:
Fixed cost is expected to increase by 5%.
Compute the revised variable cost:
Total variable cost is $30.
Distribution of variable cost:
Expense | Ratio | Amount |
Labor costs | 50% | 15 |
Material costs | 25% | 7.5 |
Variable | 25% | 7.5 |
Total variable cost | 30 |
Table: (1)
Variable cost overhead is not given in the question so it is assumed that it is calculated by subtracting the labor costs (50%) and material costs (25%) from the total variable cost (100%).
Working note 4:
Compute the revised variable cost:
Variable cost is raised by the following percentage:
Expense | Amount | Change % | Revised amount |
Labor costs | 15 | 15% | 17.25 |
Material costs | 7.5 | 10% | 8.25 |
Variable overhead costs | 7.5 | 20% | 9 |
Total revised variable cost | 34.5 |
Table: (2)
Working note 5:
Compute the contribution margin:
Particulars | Amount |
Sales (unit) (2) | $66 |
Less: Variable cost (unit) (4) | $34.5 |
Contribution | $31.5 |
Table: (3)
b.
Compute the volume of sales and the dollar sales level necessary to provide the 6 per cent increase in profits of Company S; assuming that the maximum price increase is implemented.
b.
Answer to Problem 49P
The necessary volume of sales is 80,318 units and the dollar sales level is $5,300,988 required to provide the 6 per cent increase in profits of Company S; assuming that the maximum price increase is implemented.
Explanation of Solution
Target volume: the level of sales which need to be achieved during a particular period of time is termed as target volume.
Target profit: the amount of profit which needs to be achieved during a particular period of time on a particular level of sales is termed as target profit.
Compute the volume of sales and the dollar sales level necessary to provide the 6 per cent increase in profits of Company S; assuming that the maximum price increase is implemented:
Working note 6:
Compute the target volume to provide the 6 per cent increase in profit of Company S:
Thus, the target volume is 80,318 and target dollar sales are $5,300,988 at the current level of profit
Working note 7:
Compute the desired profit:
c.
Compute the price increase required to attain the 6 per cent increase in profit when the volumes of sales were to remain at 80,000 units.
c.
Answer to Problem 49P
The price decrease required to attain the 6 per cent increase in profit when the volumes of sales were to remain at 80,000 units is $6.125 which is 10.2%
Explanation of Solution
Compute the price increase required to attain the 6 per cent increase in profit when the volumes of sales were to remain at 80,000 units:
Thus, the price should be increased by $6.125 to attain a 6% increase in profit.
Working note 8:
Let
Sales price: P
Put the values in the profit equation:
Thus,
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Chapter 3 Solutions
Fundamentals Of Cost Accounting (6th Edition)
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