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Scholes Systems supplies a particular type of office chair to large retailers such as Target, Costco, and Office Max. Scholes is concerned about the possible effects of inflation on its operations. Presently, the company sell 90,000 units for $70 per unit. The variable production costs are $35, and fixed costs amount to $1,500,000. Production engineers have advised management that they expect labor costs to rise by 20% and unit material costs to rise by 5% in the coming year. Of the $35 variable costs, 60% are from labor and 15% are from materials. Variable overhead costs are expected to increase by 25%. Sales prices cannot increase more than 10%. It is also expected that fixed costs will rise by 4% 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 5% during the year.

Required:

a. Compute the volume in units and the dollar sales level necessary to maintain the present profit level, assuming the maximum price increase is implemented.

b. Compute the volume of sales and the dollar sales level necessary to provide 5% increase in profits, assuming that the maximum price increase is implemented.

c. If the volume of sales were to remain at 90,000 units, what price change would be required to attain the 5% price increase in profits?

Calculate the new price.

Required A Required B Required C

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