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Cost Accounting Chapter 3 Assignment #1

Scholes Systems produces office chairs and sells 80,000 units per year for $60 each. With rising costs expected next year, the company wants to maintain its $1 million profit level. To do so, it would need to sell 78,413 units for $5.17 million at a maximum 10% higher price of $66 per unit. To achieve the desired 6% profit increase of $1.06 million, the company would need sales of 80,318 units for $5.3 million at the higher $66 price.

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Tawan Vihokratana
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116 views

Cost Accounting Chapter 3 Assignment #1

Scholes Systems produces office chairs and sells 80,000 units per year for $60 each. With rising costs expected next year, the company wants to maintain its $1 million profit level. To do so, it would need to sell 78,413 units for $5.17 million at a maximum 10% higher price of $66 per unit. To achieve the desired 6% profit increase of $1.06 million, the company would need sales of 80,318 units for $5.3 million at the higher $66 price.

Uploaded by

Tawan Vihokratana
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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1. Award: 5 out of 5.00 points  

Scholes Systems supplies a particular type of office chair to large retailers such as Target, Costco, and Office Max. Scholes is concerned
about the possible effects of inflation on its operations. Presently, the company sells 80,000 units for $60 per unit. The variable
production costs are $30, and fixed costs amount to $1,400,000. 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 $30 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 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 6 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 6 percent increase in profits, assuming that the
maximum price increase is implemented.
c. If the volume of sales were to remain at 80,000 units, what price change would be required to attain the 6 percent increase in profits?
Calculate the new price.

Complete this question by entering your answers in the tabs below.

Required A Required B Required C

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. (Do not round intermediate calculations. Round up your answer for "Volume in
units" to the nearest whole number and round your answer for "Sales" to the nearest whole dollar amount.)

Volume in units 78,413 

Sales $ 5,175,278 

 Required A Required B 

References

Worksheet Difficulty: 2 Medium Learning Objective: 03-01 Use cost-volume-profit (CVP)


analysis to analyze decisions.

Scholes Systems supplies a particular type of office chair to large retailers such as Target, Costco, and Office Max. Scholes is
concerned about the possible effects of inflation on its operations. Presently, the company sells 80,000 units for $60 per unit. The
variable production costs are $30, and fixed costs amount to $1,400,000. 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 $30 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 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 6 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 6 percent increase in profits, assuming that the
maximum price increase is implemented.
c. If the volume of sales were to remain at 80,000 units, what price change would be required to attain the 6 percent increase in profits?
Calculate the new price.

Complete this question by entering your answers in the tabs below.

Required A Required B Required C

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. (Do not round intermediate calculations. Round up your answer for "Volume in
units" to the nearest whole number and round your answer for "Sales" to the nearest whole dollar amount.)

Volume in units 78,413+/-1


Sales $ 5,175,258+/-0.002%

 Required A Required B 

 
Explanation:

a.
Current profit = 80,000 units × ($60 − $30) − $1,400,000 = $1,000,000
Variable costs. New variable cost per unit:
Labor + Materials + Overhead
(115% × 50% × $30) + (110% × 25% × $30) + (120% × 25% × $30) = $34.50
Price: New price = 110% × $60 = $66.00
Fixed costs: New fixed costs = 105% × $1,400,000 = $1,470,000
Sales: Profit target = $1,000,000
Profit = (P − V)X − F
$1,000,000 = ($66.00 − $34.50)X − $1,470,000
X = $2,470,000 ÷ ($66.00 − $34.50)
= 78,413 units (rounded)
or sales of 78,413 × $66 = $5,175,258

b.
Profit target = $1,000,000 × 106% = $1,060,000
Profit = (P − V)X − F
$1,060,000 = ($66.00 − $34.50)X − $1,470,000
X = $2,530,000 ÷ ($66.00 − $34.50)
= 80,318 units (rounded)
or sales of 80,318 × $66.00 = $5,300,988

c.
Profit = PX − VX − F
$1,060,000 = P(80,000) – ($34.50 × 80,000) – $1,470,000
Rearranging,
$1,060,000 + ($34.50 × 80,000) + $1,470,000 = P(80,000)
P = $5,290,000 ÷ 80,000
P = $66.13 (rounded) or a 10.2% increase

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