Problem 20.6A (Static) Analyzing the Effects of Changes in Costs (LO20-4, LO20-5, LO20-6, LO20-7, LO20-9)

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 semivariable 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		30				60
Contribution margin per unit (40%)					$	40
Fixed costs					$	390,000

Required:

a.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 do you solve this step by step. I asked this previously however part A is not 105. The correct answer is 5. May you please show me step by step how 5 is the correct answer. Thank you.