Question

Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $2,380,000 based on a sales volume of 240,000 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 $500,000.

Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent. (Ignore income taxes.)

Required:

Calculate Disk City’s break-even point for the current year in number of video disks. (Round your final answer up to nearest whole number.)

What will be the company’s net income for the current year if there is a 20 percent increase in projected unit sales volume?

What volume of sales (in dollars) must Disk City achieve in the coming year to maintain the same net income as projected for the current year if the unit selling price remains at $22? (Do not round intermediate calculations. Round your final answer to the nearest whole number.)

In order to cover a 30 percent increase in the disk’s purchase price for the coming year and still maintain the current contribution-margin ratio, what selling price per disk must Disk City establish for the coming year? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

Solution:

Selling price per disk = $22

Variable cost per disk = $8 + $2 = $10

Contribution per disk = $22 - $10 = $12 per disk

Fixed cost = $500,000

Breakeven point (Units) = Fixed cost / contribution per unit = $500,000/$12 = 41667 disk

If projected sales volume increased by 20% then revised sales volume = 240000*120% = 288000 disk

Net Income = 288000*$12 - $500,000 = $2,956,000

In the coming year purchase price of video disk will increase by 30%

Reviese purchase price = $8*130% = $10.40

Revised contribution = $22 - $10.40 - $2 = $9.60 per disk

Target profit for current year = $2,380,000

Target contribution = $2,380,000 + $500,000 = $2,880,000

Required sales units = Target contribution / Contribution per unit = $2,880,000 / $9.60 = 300000 disk

Target sales volume (In dollar) = 300000*22 = $6,600,000

Current contribution margin ratio $12/22 = 54.54545454%

Current variable costing ratio = $10/22 = 45.45454545%

Revised variable cost in coming year = $12.40

Therefore required selling price to maintain current contribution margin ratio= Variable cost per disk / variable cost ratio

= $12.40 / 45.45454545% = $27.28 per unit