Argentina Partners is concerned about the possible effects of inflation
on its operation. Presently, the company sells 60,000 units for $30 per
unit. The variable production costs are $15, and fixed costs amount to
$700,000. Production engineers have advised management that they expect
unit labor cost to rise by 15 percent and unit materials cost to rise by
10 percent in the coming year. Of the $15 variable cost, 50 percent are
from labor and 25 percent are from material. Variable overhead costs
are expected to increase by 20 percent. Sales prices cannot increase
more than 10 percent. It is also expected that fixed cost 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 dollars 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 increases is implemented.
c. If the volume of dales were to remain at 60,000 units, what price
increase would be required to attain the 6 percent increase in profits?
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