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Corrientes Company produces a single product in its Buenos Aires plant that currently sells for 5.40 p per unit. Fixed costs are expected to amount to 54,000 p for the year, and all variable manufacturing and administrative costs are expected to be incurred at a rate of 3.00 p per unit. Corrientes has two salespeople who are paid strictly on a commission basis. Their commission is 9 percent of the sales revenue they generate. (Ignore income taxes.) (p denotes the peso, Argentina's national currency. Many countries use the peso as their national currency. On the day this exercise was written, Argentina's peso was worth $0.104 U.S. dollar) Required: 1. Suppose management alters its current plans by spending an additional amount of 3,000 pon advertising and increases the selling price to 6.40 p per unit. Calculate the profit on 70,000 units. (Do not round Intermediate calculations. Enter your answer in pesos.) 2. The Sorde Company has just approached Corrientes to make a special one-time purchase of 15,000 units. These units would not be sold by the sales personnel, and therefore, no commission would have to be paid. What is the price Corrientes would have to charge per unit on this special order to earn additional profit of 30,000 p? (Do not round intermediate calculations. Round your answer to 2 decimal places. Enter your answer in pesos.)

Answer :

1. The profit on 70,000 units with the advertising and selling price increase is 181,000 p

2. The price Corrientes would have to charge is at least 5.00 p per unit on the special order to earn an additional profit of 30,000 p.

How to calculate profit

Without the advertising and selling price increase, the contribution margin per unit is:

Selling price per unit - Variable cost per unit

= 5.40 p - 3.00 p

= 2.40 p

With 70,000 units sold, the total contribution margin is:

Contribution margin per unit x Number of units sold

= 2.40 p x 70,000

= 168,000 p

The fixed costs are 54,000 p, so the operating profit without the advertising and selling price increase is:

Operating profit = Total contribution margin - Fixed costs

= 168,000 p - 54,000 p

= 114,000 p

With the advertising and selling price increase, the new contribution margin per unit is:

Selling price per unit - Variable cost per unit

= 6.40 p - 3.00 p

= 3.40 p

With 70,000 units sold, the total contribution margin is:

Contribution margin per unit x Number of units sold

= 3.40 p x 70,000

= 238,000 p

The fixed costs are still 54,000 p, so the operating profit with the advertising and selling price increase is:

Operating profit = Total contribution margin - Fixed costs - Additional advertising cost

= 238,000 p - 54,000 p - 3,000 p

= 181,000 p

Thus, the profit on 70,000 units with the advertising and selling price increase is 181,000 p.

The contribution margin per unit on the special one-time purchase of 15,000 units needs to be at least:

Desired profit / Number of units sold

= 30,000 p / 15,000 units

= 2 p per unit

The variable cost per unit is 3.00 p, so the minimum price per unit that Corrientes can charge is:

Variable cost per unit + Desired contribution margin per unit

= 3.00 p + 2.00 p

= 5.00 p

Therefore, Corrientes would need to charge at least 5.00 p per unit on the special order to earn an additional profit of 30,000 p.

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