Problem $20\mathrm{.}6$A $($Static$)$ Analyzing the Effects of Changes in Costs $($LO$20-4,$ LO$20-5,$ LO$20-6,$ LO$20-7,$ LO$20-9)$

Precision Systems manufactures CD burners and currently sells $18,500$ units annually to producers of laptop computers. Jay Wilson, president of the company, anticipates a $15$ percent increase in the cost per unit of direct labor on January $1$ of next year. He expects all other costs and expenses to remain unchanged. Wilson has asked you to assist him in developing the information he needs to formulate a reasonable product strategy for next year.

You are satisfied that volume is the primary factor affecting costs and expenses and have separated the semi$-$variable costs into their fixed and variable segments. Beginning and ending inventories remain at a level of $1,000$ units. Current plant capacity is $20,000$ units.

The following are the current$-$year data assembled for your analysis:

Sales price per unit $ $100$

Variable costs per unit:

Direct materials $ $10$

Direct labor $20$

Manufacturing overhead and selling and administrative expenses $3060$

Contribution margin per unit $(40\%)$ $ $40$

Fixed costs $ $390,000$

Required:

What increase in the selling price is necessary to cover the $15$ percent increase in direct labor cost and still maintain the current contribution margin ratio of $40$ percent?

How many units must be sold to maintain the current operating income of $$350,000$ if the sales price remains at $$100$ and the $15$ percent wage increase goes into effect? $($Hint: First compute the unit contribution margin.$)$

Wilson believes that an additional $$700,000$ of machinery $($to be depreciated at $20$ percent annually$)$ will increase present capacity $(20,000$ units$)$ by $25$ percent. If all units produced can be sold at the present price of $$100$ per unit and the wage increase goes into effect, how would the estimated operating income before capacity is increased compare with the estimated operating income after capacity is increased? Prepare schedules of estimated operating income at full capacity before and after the expansion.