Question

Liu, Inc. creates DVDs for major film companies. Over the past two years, Liu has only used one machine to burn the DVDs. This machine had the capacity to burn 50,000 DVDs per month. This year Liu purchased a brand new machine for burning the DVDs that had a capacity of 60,000 DVDs per month and a cost of $2,275,000. He estimates the machine has a useful life of five years. Before production of DVDs, Liu purchases blank DVDs from a domestic supplier at a cost of $0.25 / DVD. The manufacturing process requires two line workers; one to run the machine and one to package the DVDs. These employees are paid $0.05 / DVD produced (each). Cost of packaging is $1.75 / DVD. Additionally, Liu hired a production supervisor and is paying her $ 65,000 / year in salary and pays $ 9,000 / year in insurance. This year Liu estimates he will produce and sell a total of 1,000,000 DVDs (sales price = $5.50 / DVD). Please answer the following questions using Excel.

What will be Liu’s before-tax profit if he meets his sales goal?

What will be his total cost / DVD at this level of sales?

What will be Liu’s before-tax profit if he produces and sells 1,200,000 DVDs annually?

What will be his total cost / DVD at this level of sales?

What is his break-even point in units and sales dollars?

Answer 1

Liu's before tax profit if sales are 1000000 DVDs in the year

Sales price	$5.50
variable cost
DVD purchase	$0.25
Wages	$0.10
Packaging	$1.75
Total variable cost	$2.10
Contribution margin per DVD	$3.40
Total contribution margin	$34,00,000
Fixed costs
Depreciation	$4,55,000
Supervisor salary	$65,000
Insurance	$9,000
Total fixed costs	$5,29,000
Pre tax profit	$28,71,000

Total cost/DVD at this level of sales

Total variable cost	$21,00,000
Total fixed costs	$5,29,000
Total cost	$26,29,000
Total cost/DVD	$2.63

Liu's before tax profit if he produces and sells 1,200,000 DVDs annually

Sales price	$5.50
variable cost
DVD purchase	$0.25
Wages	$0.10
Packaging	$1.75
Total variable cost	$2.10
Contribution margin per DVD	$3.40
Total contribution margin	$40,80,000
Fixed costs
Depreciation	$4,55,000
Supervisor salary	$65,000
Insurance	$9,000
Total fixed costs	$5,29,000
Pre tax profit	$35,51,000

Total cost/DVD at this level of sales

Total variable cost	$25,20,000
Total fixed costs	$5,29,000
Total cost	$30,49,000
Total cost/DVD	$2.54

Break even point in units = fixed costs / contribution margin per unit

= 529000 / 3.4

= 155,588 DVDs

Break even point in dollars = 155588 * 5.5

= $8,55,735.29