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 96,000 units for $60 per unit. The variable production costs are $30, and fixed costs amount to $1,560,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 5 percent in the coming year. Of the $30 variable costs. 60 percent are from labor and 20 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 6 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 7 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 7 percent increase in profits, assuming that the maximum price increase is implemented. c. If the volume of sales were to remain at 96,000 units, what price change would be required to attain the 7 percent increase in profits? Calculate the new price.
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 96,000 units for $60 per unit. The variable production costs are $30, and fixed costs amount to $1,560,000. Production engineers have advised management that they expect unit labor costs to rise by 20 percent and unit materials costs to rise by 5 percent in the coming year. Of the $30 variable costs. 60 percent are from labor and 20 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 6 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 7 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 7 percent increase in profits, assuming that the maximum price increase is implemented. c. If the volume of sales were to remain at 96,000 units, what price change would be required to attain the 7 percent increase in profits? Calculate the new price.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 96,000 units for $60 per unit. The
variable production costs are $30, and fixed costs amount to $1,560,000. Production engineers have advised management that they
expect unit labor costs to rise by 20 percent and unit materials costs to rise by 5 percent in the coming year. Of the $30 variable costs.
60 percent are from labor and 20 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 6 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 7 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 7 percent increase in profits, assuming that the
maximum price increase is implemented.
c. If the volume of sales were to remain at 96,000 units, what price change would be required to attain the 7 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
Sales
Required A
Required B >
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