Scholes Systems supplies a particular type of office chair to large retailers such as Target, Costco, and Office Max. Sc
Posted: Sun Jun 05, 2022 7:31 pm
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 98,000 units for $70 per
unit. The variable production costs are $40, and fixed costs amount
to $1,580,000. 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
$40 variable costs, 55 percent are from labor and 30 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 7 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 98,000 units, what
price change would be required to attain the 8 percent increase in
profits? Calculate the new price.
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 98,000 units for $70 per
unit. The variable production costs are $40, and fixed costs amount
to $1,580,000. 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
$40 variable costs, 55 percent are from labor and 30 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 7 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 98,000 units, what
price change would be required to attain the 8 percent increase in
profits? Calculate the new price.