QUESTION 7

In June, 20XA, the Rolon Corporation sold 50 air conditioners for $200 each. Costs included: materials costs of $50 per unit, direct labor costs of $30 per unit, and factory overhead at 100% of direct labor cost. Interest expense on an 8% bank loan was equivalent to $2 per unit. Federal income tax at a 30% rate was equivalent to $15 per unit.

Effective July I, 20XA, materials costs decreased 5% per unit and direct labor costs increased 20% per unit. Also effectively July I, 2007, the interest rate on the bank loan increased from 8% per annum to 9% per annum.

Assume in requirements (7.1) and (7.2) that the expected July sales volume is 50 units, the same as for June.

Required:

7.1The sales price per unit that will produce the same ratio of gross profit, assuming no change in the rate of factory overhead in relation to direct labor costs.

7.2The sales price per unit that will produce the same ratio of gross profit, assuming that $10 of the June, 20ZA, factory overhead consists of fixed costs and that the variable factory overhead ratio to direct labor costs is unchanged from June, 20XA.