Question

Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $1,120,000 based on a sales volume of 210,000 video disks. Disk City has been selling the disks for $22 each. The variable costs consist of the $12 unit purchase price of the disks and a handling cost of $2 per disk. Disk City’s annual fixed costs are $560,000.

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 10 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;

Part 1 – Break Even Point for Current Year in number of video disks

Break Even Point (in Units) = Total Fixed Costs / Contribution Margin Per Unit

Contribution Margin Per Unit = Unit Selling Price $22 – (Total Variable Cost per unit $12 + $2)

= $22 – 14

= $8 per unit

Break Even Point (in Units) = Total Fixed Costs $560,000 / Contribution Margin Per Unit 8

= 70,000 disks

Part 2 – Net Income of the company if there is a 10 percent increase in projected unit sales volume

After increase of 10%, the sales volume will be = 210,000 disks x 110% =

	$$
Sales Revenue (231,000 disks * Unit Selling Price $22)	$5,082,000
Less: Total Variable Costs (231,000 disks * $14 per unit)	$3,234,000
Contribution Margin	$1,848,000
Less: Fixed Costs	$560,000
Net Income	$1,288,000

Part 3 -- 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

New Purchase Price Per Unit for coming year = Old Price $12 + Increase 30% = $15.60

Total Variable Cost Per unit for coming year = Purchase Price 15.60 + Handling cost $2 = $17.60 per unit

Contribution Margin Per Unit = Unit Selling Price 22 – Total Variable Cost per unit 17.60 $4.40 per unit

CM Ratio = CM per unit 4.40 / Unit Selling Price 22 x 100 = 20%

Volume of Sales in dollars need to achieve net income $1,120,000 = (Total Fixed Costs $560,000 + Desired Income $1,120,000) / CM Ratio 20%

= $8,400,000

Part 4 -- 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

Current Contribution margin ratio = Contribution Margin (22 – 14) / Unit Selling Price 22 x 100

= 36.363636%

To cover 30% increase in disk’s purchase price and maintaining current CM ratio, selling price per disk

Contribution Margin 36.363636% = (Unit Selling Price – New Total Variable Cost per unit 17.60) / Unit Selling Price

0.363636 Unit Selling Price = Unit Selling Price – New Variable Cost per unit $17.60

USP – 0.36363636 USP = Variable Cost per unit 17.60

0.63636363 USP = $17.60

Unit Selling Price = 17.60 / 0.63636363 = $27.66 Per unit

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