SOLVING FOR UNKNOWN

Cost-Volume-Profit and Budget Analysis

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.
IBN Corporation
Partial Income Statement for Year 0
Sales (100,000 units @ $10)
Cost of Goods Sold
Gross Margin
Selling Costs
Administrative Costs
Operating Profits

$
$

150,000
100,000

$
$
$

1,000,000
600,000
400,000

$
$

250,000
150,000

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 due to increased volume
6%
increase in administrative costs due to increased wages
a. what must the unit sales price be in Year 1 for IBN Corporation to earn a $200,000 operating profit?
b. What will be the Year 1 operating profit if selling prices are increased as before, but unit sales increase by 10% rather than
30%? (Selling costs would go up by only 1/3 of the amount projected previously.)
c. If selling price in Year 1 remains at $10 per unit, how many units must be sold in Year 1 for the operating profit to be $200,000?

WORKINGS
Sales
COGS
Material
Labour
VO
FO

$1,000,000
$280,000
$186,665
$93,335
$40,000

Gross Margin
SC
AC

$600,000
$400,000

$150,000
$100,000

Operating Profit

$250,000
$150,000

SOLUTION 1
Sales
COGS
Material
Labour
VO
FO

SOLUTION 2
30%
20% $336,000
15% $214,665
10% $102,669
5% $42,000

Gross Margin
SC
AC

8% $162,000
6% $106,000

Operating Profit

$1,300,000

$695,333

Sales
COGS
Material
Labour
VO
FO

$604,667

Gross Margin

$268,000

SC
AC

$336,667

Operating Profit

$8.9487

SOLUTION 3

SP=$10

Sales
COGS
Material
Labour
VO
FO

$1,000,000

$1,155,330

10% unit
20% $336,000
15% $214,665
10% $102,669
5% $42,000

Proof

$695,333

$695,333

Gross Margin

$304,667

$459,997

SC
AC

$260,000

$260,000

$44,667

$199,997

2.6667% $154,000
6% $106,000

Operating Profit

If sales price is $ 10 and 100,000 units, then profit is $44,667

The difference in profit is $200,000-44,667 = $155,333
Then extra sale required is 155,333/10 = 15,533 units (rounded off)

20% $336,000
15% $214,665
10% $102,669
5% $42,000

$984,359

$695,333
$289,026

2.6667% $154,000
6% $106,000

If Sale price is same as $10 than OP is $ 336,667.

To have OP of $200,000 reduce price by following calculation
(336,667-200,000)/130,000
1.051283
The sale price should be

SP =$ 8.9487
10% unit

$260,000
$29,026