Product Pricing: Single Product (LO2)

Presented is the 2014 contribution income statement of Colgate Products.

COLGATE PRODUCTS

Contribution Income Statement

For Year Ended December 31, 2014

Sales (13,000 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,560,000

Less variable costs

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $520,000

Selling and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,000

(663,000)

Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897,000

Less fixed costs

Manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,000

Selling and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,000

(730,000)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 167,000

During the coming year, Colgate expects an increase in variable manufacturing costs of $8 per unit and

in ?xed manufacturing costs of $35,000.

Required

a. If sales for 2015 remain at 13,000 units, what price should Colgate charge to obtain the same pro?t

as last year?

b. Management believes that sales can be increased to 16,000 units if the selling price is lowered to

$107. Is this action desirable?

c. After considering the expected increases in costs, what sales volume is needed to earn a pro?t of

$167,000 with a unit selling price of $107?