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Scholes Systems

Scholes Systems supplies a particular type of office chair to large retailers. Scholes is concerned about the possible effect 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 labor costs to rise by 15% and unit materials costs to rise by 10% in the coming year. Of the $30 variable costs, 50% are from the labor and 25% are from materials. Variable overhead costs are expected to increase by 20%. Sales prices cannot increase more than 10%. It is also expected that fixed costs will rise by 5% 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% during the year.

a. Compute the volume in units and 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 necessary to provide the 6% 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% increase in profits?

Solution Preview

Scholes Systems supplies a particular type of office chair to large retailers. Scholes is concerned about the possible effect 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 labor costs to rise by 15% and unit materials costs to rise by 10% in the coming year. Of the $30 variable costs, 50% are from the labor and 25% are from materials. Variable overhead costs are expected to increase by 20%. Sales prices cannot increase more than 10%. It is also expected that fixed costs ...

Solution Summary

This solution is comprised of a detailed explanation to compute the volume in units and dollar sales level necessary to maintain the present profit level, assuming that the maximum price increase is implemented.

$2.19