Question

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 74,000 units for $40 per unit. The variable production costs are $17, and fixed costs amount to $840,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming year. Of the $17 variable costs, 50 percent are from labor and 25 percent are from materials. Variable overhead costs are expected to increase by 20 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 11 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. b. Compute the volume of sales and the dollar sales level necessary to provide the 11 percent increase in profits, assuming that the maximum price increase is implemented. c. If the volume of sales were to remain at 74,000 units, what price increase would be required to attain the 11 percent increase in profits? Calculate the new price.

Answer 1

Argentina Partners needs to calculate the volume and dollar sales level to maintain profit level, taking into account potential increases in costs and fixed costs. If sales volume remains the same, the company would need to increase the price to attain the desired profit increase.

Step-by-step explanation:

To maintain the present profit level, Argentina Partners needs to compute the volume in units and the dollar sales level necessary. Given that sales prices cannot increase more than 10 percent, the company must find a balance by increasing the sales volume. By calculating the increase in variable costs for labor, materials, and overhead costs, as well as the increase in fixed costs, the company can determine the necessary volume and sales level to maintain the profit level. If the volume of sales were to remain at 74,000 units, the company would need to increase the price by a certain percentage in order to attain the desired 11 percent increase in profits.

Answer 2

Instructions are listed below

Step-by-step explanation:

Giving the following information:

The company sells 74,000 units for $40 per unit.

The variable production costs are $17.

Fixed costs amount to $840,000.

Of the $17 variable costs, 50 percent are from labor and 25 percent are from materials.

Inflation:

Unit labor costs to rise by 15 percent

Unit materials costs to rise by 10 percent.

Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase by more than 10 percent.

It is also expected that fixed costs will rise by 10 percent.

New prices:

Direct materials= ($17*0.25)*1.10= $4.675

Direct labor= ($17*0.50)*1.15= $9.775

Manufacturing overhead= (17*0.25)*1.20= $5.1

Total variable cost= $19.55

Total fixed cost= 840000*1.10= $924,000

New sales price= 40*1.10= $44

1) Net profit before inflation:

Sales= 74000*40=$2,960,000

Variable costs= 17*74000= $1,258,000

Contribution margin= $1,702,000

Fixed costs= 840,000

Net profit= $862,000

Now, we have to maintain the level of profit with the new prices

Break-even point= (fixed costs+profit)/(contribution margin)

Break-even point= (924000+862000)/(44-19.55)

Break-even point= 73047 units

Sales= 73047*44= $3,214,068

2) Now, profit must increase by 11%.

net profit= 862000*1.11=$956820

Break-even point= (fixed costs+profit)/(contribution margin)

Break-even point= (924000+956820)/(44-19.55)

Break-even point= 76925.15units

Sales= $3,384,706.6

3)Now, Q=74000

net profit= 862000*1.11=$956820

Break-even point= (fixed costs+profit)/(contribution margin)

Break-even point= (924000+956820)/(P-19.55)

74000=(924000+956820)/(P-19.55)

74000P- 1446700= 1880820

P=(1880820+1446700)/74000

P=$44.966486