The new price is $44.966486
What is meant by Break-even point?
In economics, business, and particularly cost accounting, the break-even point is the point at which total cost and total income are equal, or "even." Although opportunity costs have been paid and capital has received the risk-adjusted, projected return, there is no net loss or gain, and one has "broken even." The break-even threshold is reached when overall costs and total revenues are equal, leaving your small firm with no net benefit or loss. In other words, you've achieved the point in production where the revenue from a product equals the cost of manufacture.
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
The complete question is,
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.