FUNDAMENTALS OF COST ACCOUNTING
FUNDAMENTALS OF COST ACCOUNTING
6th Edition
ISBN: 9781264192236
Author: LANEN, ANDERSO
Publisher: McGraw Hil
Question
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Chapter 3, Problem 49P

a.

To determine

Compute the volume in units and the dollar sales level necessary to maintain the present profit level of Company S; assuming that the maximum price increase is implemented.

a.

Expert Solution
Check Mark

Answer to Problem 49P

The target volume is 78,413 and target dollar sales are $5,175,258 at the current level of profit.

Explanation of Solution

Target volume: the level of sales which need to be achieved during a particular period of time is termed as target volume.

Target profit: the amount of profit which needs to be achieved during a particular period of time on a particular level of sales is termed as target profit.

Compute the volume in units and the dollar sales level necessary to maintain the present profit level of Company S; assuming that the maximum price increase is implemented:

Sales=Targetvolume×Salesprice(unit)=78,413×$66=$5,175,258

Compute the target volume at the current level of profit:

Targetvolume=Fixedcost(3)+Desrisedprofit(1)Contributionmargin(5)=$1,470,000+$1,000,000$31.5=78,413units

Thus, the target volume is 78,413 and target dollar sales are $5,175,258 at the current level of profit.

Working note 1:

Compute the current level of profit:

Profit=TotalrevenueTotalcosts=Sales(unit)×Salesprice(unit)Variablecosts+Fixedcost=Sales(unit)×Salesprice(unit)[(Sales(unit)×Variablecost(unit))+Fixedcost]=80,000×$60[(80,000×$30)+$1,400,000]=$1,000,000

Working note 2:

Compute the revised variable cost:

Sales price is expected to increase by not more than 10%.

Revisedsales=Sales+Change%=$60+($60×10%)=$66

Working note 3:

Compute the revised fixed cost:

Fixed cost is expected to increase by 5%.

Revisedfixedcost=Fixedcost+Change%=$1,400,000+($1,400,000×5%)=$1,470,000

Compute the revised variable cost:

Total variable cost is $30.

Distribution of variable cost:

ExpenseRatioAmount
Labor costs50%15
Material costs25%7.5
Variable overhead costs25%7.5
Total variable cost30

Table: (1)

Variable cost overhead is not given in the question so it is assumed that it is calculated by subtracting the labor costs (50%) and material costs (25%) from the total variable cost (100%).

Working note 4:

Compute the revised variable cost:

Variable cost is raised by the following percentage:

ExpenseAmountChange %Revised amount
Labor costs1515%17.25
Material costs7.510%8.25
Variable overhead costs7.520%9
Total revised variable cost34.5

Table: (2)

Working note 5:

Compute the contribution margin:

ParticularsAmount
Sales (unit) (2)$66
Less: Variable cost (unit) (4)$34.5
Contribution$31.5

Table: (3)

b.

To determine

Compute the volume of sales and the dollar sales level necessary to provide the 6 per cent increase in profits of Company S; assuming that the maximum price increase is implemented.

b.

Expert Solution
Check Mark

Answer to Problem 49P

The necessary volume of sales is 80,318 units and the dollar sales level is $5,300,988 required to provide the 6 per cent increase in profits of Company S; assuming that the maximum price increase is implemented.

Explanation of Solution

Target volume: the level of sales which need to be achieved during a particular period of time is termed as target volume.

Target profit: the amount of profit which needs to be achieved during a particular period of time on a particular level of sales is termed as target profit.

Compute the volume of sales and the dollar sales level necessary to provide the 6 per cent increase in profits of Company S; assuming that the maximum price increase is implemented:

Sales=Targetvolume(6)×Salesprice(unit)=80,318×$66=$5,300,988

Working note 6:

Compute the target volume to provide the 6 per cent increase in profit of Company S:

Targetvolume=Fixedcost(3)+Desrisedprofit(7)Contributionmargin(5)=$1,470,000+$1,060,000$31.5=80,318units

Thus, the target volume is 80,318 and target dollar sales are $5,300,988 at the current level of profit

Working note 7:

Compute the desired profit:

Desiredprofit=Presentlevelprofit+Change%=$1,000,000+(1,000,000×6%)=$1,060,000

c.

To determine

Compute the price increase required to attain the 6 per cent increase in profit when the volumes of sales were to remain at 80,000 units.

c.

Expert Solution
Check Mark

Answer to Problem 49P

The price decrease required to attain the 6 per cent increase in profit when the volumes of sales were to remain at 80,000 units is $6.125 which is 10.2%

Explanation of Solution

Compute the price increase required to attain the 6 per cent increase in profit when the volumes of sales were to remain at 80,000 units:

Priceincrease=Currentprice(8)Originalprice=$66.125$60=$6.125

Thus, the price should be increased by $6.125 to attain a 6% increase in profit.

Working note 8:

Let

Sales price: P

Put the values in the profit equation:

Profit=TotalrevenueTotalcosts$1,060,000=Sales(unit)×Salesprice(unit)[(Sales(unit)×Variablecost(unit))+Fixedcost]$1,060,000=80,000×P[(80,000×$34.5)$1,470,00080,000×P=$1,060,000+$1,470,000+(80,000×$34.5)

Thus,

$5,290,000=80,000×PP=$5,290,00080,000P=$66.125

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Chapter 3 Solutions

FUNDAMENTALS OF COST ACCOUNTING

Ch. 3 - Why is it common to assume a fixed sales mix...Ch. 3 - What are some important assumptions commonly made...Ch. 3 - Prob. 13CADQCh. 3 - Prob. 14CADQCh. 3 - The typical cost-volume-profit graph assumes that...Ch. 3 - The assumptions of CVP analysis are so simplistic...Ch. 3 - Prob. 17CADQCh. 3 - Consider a class in a business school where volume...Ch. 3 - Prob. 19CADQCh. 3 - Prob. 20CADQCh. 3 - Consider the Business Application,...Ch. 3 - Consider the Business Application,...Ch. 3 - Prob. 23CADQCh. 3 - Profit Equation Components Identify each of the...Ch. 3 - Profit Equation Components Identify the letter of...Ch. 3 - Basic Decision Analysis Using CVP Anus Amusement...Ch. 3 - Basic CVP Analysis The manager of Dukeys Shoe...Ch. 3 - CVP AnalysisEthical Issues Mark Ting desperately...Ch. 3 - Basic Decision Analysis Using CVP Derby Phones is...Ch. 3 - Prob. 30ECh. 3 - Basic Decision Analysis Using CVP Warner Clothing...Ch. 3 - Basic Decision Analysis Using CVP Refer to the...Ch. 3 - Prob. 33ECh. 3 - Prob. 34ECh. 3 - Analysis of Cost Structure Spring Companys cost...Ch. 3 - CVP and Margin of Safety Bristol Car Service...Ch. 3 - CVP and Margin of Safety Caseys Cases sells cell...Ch. 3 - Prob. 38ECh. 3 - Prob. 39ECh. 3 - Refer to the data for Derby Phones in Exercise...Ch. 3 - Refer to the data for Warner Clothing in Exercise...Ch. 3 - CVP with Income Taxes Hunter Sons sells a single...Ch. 3 - CVP with Income Taxes Hammerhead Charters runs...Ch. 3 - Prob. 44ECh. 3 - Prob. 45ECh. 3 - Prob. 46ECh. 3 - Prob. 47ECh. 3 - CVP Analysis and Price Changes Argentina Partners...Ch. 3 - Prob. 49PCh. 3 - CVP AnalysisMissing Data Breed Products has...Ch. 3 - Prob. 51PCh. 3 - Prob. 52PCh. 3 - CVP AnalysisSensitivity Analysis (spreadsheet...Ch. 3 - Prob. 54PCh. 3 - Prob. 55PCh. 3 - Extensions of the CVP ModelSemifixed (Step) Costs...Ch. 3 - Prob. 57PCh. 3 - Extensions of the CVP ModelTaxes Odd Wallow Drinks...Ch. 3 - Prob. 59PCh. 3 - Prob. 60PCh. 3 - Extensions of the CVP ModelTaxes Toys 4 Us sells...Ch. 3 - Extensions of the CVP AnalysisTaxes Eagle Company...Ch. 3 - Extensions of the CVP ModelMultiple Products...Ch. 3 - Extensions of the CVP ModelMultiple Products...Ch. 3 - Prob. 65PCh. 3 - Prob. 66PCh. 3 - Prob. 67PCh. 3 - Prob. 68PCh. 3 - Extensions of the CVP ModelMultiple Products and...Ch. 3 - Extensions of the CVP ModelTaxes With Graduated...Ch. 3 - Prob. 71PCh. 3 - Financial Modeling Three entrepreneurs were...
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