Assignment
Solving for unknown; cost-volume-profit and budget analysis (adapted from a problem by D.O. Green). A partial income statement of IBN Corporation for Year 0 follows. The company uses just-in-time inventory, so production each year equals sales. Each dollar of finished product produced in Year 0 contained $0.50 of direct materials, $0.33333 of direct labor, and $0.16667 of overhead costs. During Year 0, fixed overhead costs were $40,000. No changes in production methods or credit policies are anticipated for Year 1.
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Partial Income Statement for Year 0
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Sales (100,000 units at $10)
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600,000
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Cost of goods sold
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$400,000
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Gross margin
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$150,000
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Selling costs
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$150,000
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Administrative costs
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100,000
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$250,000
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Operating profits
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$150,000
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Management has estimated the following changes for Year 1:
• 30% increase in number of units sold
• 20% increase in unit cost of materials
• 15% increase in direct labor cost per unit
• 10% increase in variable overhead cost per unit
• 5% increase in fixed overhead costs
• 8% increase in selling costs because of increased volume
• 6% increase in administrative costs arising solely because of increased wages
There are no other changes.
a. What must the unit sales price be in Year 1 for IBN Corporation to earn a $200,000 operating profit?