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) $1,000,000
Cost of Goods Sold $600,000
Gross Margin $400,000
Selling Costs $150,000
Administrative Costs $100,000 $250,000
Operating Profits $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?