Question

Disk City, Inc. Is a retailer for digital video disks. The projected net income for the current year is $200,000 based on a sales volume of $200,000 video disks. Disk City has been selling the disks for $16 each. The variable costs consist of the $10 unit purchase price of the disks and a handling cost of $2 per disk. Disk City's annual Fixed costs are $600,000.

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

1.Calculate Disk City's break-even point for the current year in number of video disks.

2. What will be the company's net income for the current year if there is a 10% increase in projected units sales volume

3.What volume of sales 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 $1

4.In order to cover a 30% increase in the disk's purchase price for the coming year and still maintain the current contribution margin ratio, what selling price per must Disk City establish for the coming year?

Answer 1

1	Calculate Disk City's break-even point for the current year in number of video disks
	Break-Even Point = Fixed Expenses/Contribution per unit
		$600000/(16-12)
		150000	Video Disk
2	What will be the company's net income for the current year if there is a 10% increase in projected units sales volume
	Sales		3520000	(200000*110%*16)
	Less : Variable costs
	Purchase Price of Disks	2200000		(200000*110%*10)
	Handling Costs	440000	2640000	(200000*110%*2)
	Contribution Margin		880000
	Less : Fixed Expenses		600000
	Net Income		280000
3	What volume of sales 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 $1
	Sales Volume = (Target income+Fixed Expense)/(contribution per unit)
		(200000+600000)/(16-15)
		800000
	Disk City Should sell 800000 disc
4	Contribution Margin Ratio = 4/16		25.00%
	Purchase Price - 10*130%		13
	Handling Costs		2
	Total Costs		15	75%
	Sale Price (100*15)/75		20
	So Sale Price should be $ 20