Question

Product Pricing: Single Product Presented is the 2017 contribution income statement of Grafton Products. GRAFTON PRODUCTS Contribution Income Statement For Year Ended December 31, 2017 Sales (13,000 units) $ 2,925,000 Less variable costs Cost of goods sold $ 780,000 Selling and administrative 208,000 (988,000) Contribution margin 1,937,000 Less fixed costs Manufacturing overhead 780,000 Selling and administrative 315,000 (1,095,000) Net income $ 842,000 During the coming year, Grafton expects an increase in variable manufacturing costs of $12 per unit and in fixed manufacturing costs of $39,000.
a. If sales for 2018 remain at 13,000 units, what price should Grafton charge to obtain the same profit
as last year?
b. Management believes that sales can be increased to 16,000 units if the selling price is lowered to
$200. Is this action desirable?
c. After considering the expected increases in costs, what sales volume is needed to earn a profit of
$254,800 with a unit selling price of $200?

Answer 1

Answer:

a)647,000

b)658,000 yes as increase net income

c) 2,480,000

Explanation:

a) current net income :                                               842,000

less 13,000 x 12 increce in variable manufacturing  (156,000)

less increase in fixed MO                                             (39,000)  

                                                                                      647,000

b)

Sales        3,200,000    (16,000 x 200)

Variable   (1,408,000)  988,000x16,000/13,000 + 156,000

Contribution  1,792,000

Fixed MO (819,000)  

Fixed S&A (315,000)  

Net Income 658,000

c)

$\frac{Fixed\:Cost + Target \: Profit}{Contribution \:Margin \:Ratio} = Break\: Even\: Point_{dollars}$

$\frac{Contribution \: Margin}{Sales \: Revenue} = Contribution \: Margin \: Ratio$

1,792,000 / 3,200,000 = 0.56

$\frac{1,134,000 + 254,800}{0.56} = Break\: Even\: Point_{dollars}$