Argentina Partners is concerned about the possible effects of
inflation on its operations. Presently, the company sells 68,000
units for $45 per unit. The variable production costs are $25, and
fixed costs amount to $780,000. Production engineers have advised
management that they expect unit labor costs to rise by 20 percent
and unit materials costs to rise by 15 percent in the coming year.
Of the $25 variable costs, 50 percent are from labor and 25 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 5
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.
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.
c. If the volume of sales were to remain at 68,000 units, what price increase would be required to attain the 8 percent increase in profits? Calculate the new price.
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.
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.
c. If the volume of sales were to remain at 68,000 units, what price increase would be required to attain the 8 percent increase in profits? Calculate the new price.