 # Costs and Maximum Price Increase

3-36. CVP Analysis and Price Changes: Argentina Partners. 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. 59,365 units or sales of \$1,959,045(see calculations below) Current profit = 60,000 units x (\$30 – \$15) = \$900,000 – \$700,000 = \$200,000 Variable costs = \$15. 00 (these calculations were done in excel first for verification) Labor = 115% x 50% x \$15 + Materials = 110% x 25% x \$15 +

Overhead = 120% x 25% x \$15 = New variable cost per unit = \$17. 25 (these calculations were done in excel first for verification) Price: New price = 110% x \$30 = \$33. 00 Fixed costs: New fixed costs = 105% x \$700,000 = \$735,000 Sales: Profit target = = \$200,000 Formula is: Profit = (P – V)X – F \$200,000 = (\$33. 00 – \$17. 25)X – \$735,000 X = (\$935,000 / (\$33. 00 – \$17. 25) X = 59,365 units or sales of (59,365 X \$33) = \$1,959,045 b.

Compute the volume of sales and the dollar sales necessary to provide the 6 percent increase in profits, assuming that the maximum price increase is implemented. 60,127 units or sales of \$1,984,191(see calculations below) (these calculations were done in excel first for verification) Profit target = \$200,000 X 106% = \$212,000 (this represents the 6% increase in profits) Formula is: Profit = (P – V)X – F \$212,000 = (\$33. 00 – \$17. 25)X – \$735,000 X = \$947,000 / (\$33. 00 – \$17. 25)

X = 60,127 units or sales of (60,127x \$33. 00) = \$1,984,191 c. If the volume of sales were to remain at 60,000 units, what price would be required to attain the 6 percent increase in profits? \$33. 03 (see calculations below) Formula is: Profit = PX – VX – F \$212,000 = P(60,000) – (\$17. 25 x 60,000) – \$735,000 P = \$1,982,000 / 60,000 P = \$33. 03 References Lanen, W. N. , Anderson, S. W. , & Maher, M. W. (2011). Fundamentals of Cost Accounting (3rd ed. ). New York: McGraw-Hill Irwin.