In: Accounting
Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $2,660,000 based on a sales volume of 260,000 video disks. Disk City has been selling the disks for $22 each. The variable costs consist of the $8 unit purchase price of the disks and a handling cost of $2 per disk. Disk City’s annual fixed costs are $460,000.
Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 20 percent. (Ignore income taxes.)
Required:
I have Figured out the first 2 but am struggling on the last 2.
Solution :
(1) Current Breakeven
Break-even point in number of video disks = Total fixed cost / Contribution Margin per disk
= $ 460,000 / ($ 22 - $ 8 - $ 2)
= $ 460,000 / $ 12
= 38,333 Disks
(2) Net Income :
New sales volume = 260,000 * 110% = 286,000 disks
Company's net income if 10% increase in Sales volume = Total Contribution - Fixed Costs
= (286,000 * $ 12) - $ 460,000
= $ 2,972,000.
(3) Sales Volume in Dollars :
New variable cost per unit = ($ 8 * 1.20) - 2 = $ 11.60 per unit
Contribution margin per unit = $ 22 - $ 11.60 = $ 10.40
Desired sales volume = (Fixed cost + Projected net income) / Contribution margin ratio
Contribution margin ratio = CM Per Unit / Sales Price per Unit
= $ 10.40 / $ 22
= 47.272727%
Projected Net Income = (260,000 * $ 12) - $ 460,000 = $ 2,660,000
Desired sales volume = ($ 460,000 + $ 2,660,000 ) / 47.272727%
Desired sales volume = $ 3,120,000 / 47.272727%
= $ 6,600,000
(4) Selling Price per Unit :
Current CM Ratio = ($ 22 - $ 8 - $ 2) / $ 22 = 54.545454%
Assume Sale price is fixed is X
CM Ratio = (CM per Unit / Sale Price per Unit) * 100
54.545454 = [( $ X - $ 11.60 ) / $ X ] * 100
0.54545454 = ( $ X - $ 11.60 ) / $ X
$ 0.54545454 X = $ X - $ 11.60
$ X - $ 0.54545454 X = $ 11.60
X = $ 11.60 / 0.45454545
X = $ 25.52
New Sale Price = $ 25.52.
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