Question

Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $2,300,000 based on a sales volume of 260,000 video disks. Disk City has been selling the disks for $19 each. The variable costs consist of the $6 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 20 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 $19? (Do not round intermediate calculations. Round your final answer to the nearest whole number.)

In order to cover a 20 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

Answer 1:

Sale price per unit = $19

Variable cost per unit = Purchase price + Handling cost = $6 + $2 = $8

Contribution per unit = $19 - $8 = $11

Contribution margin ratio = 11/19

Fixed cost = $560,000

Break-even point for the current year in number of video disks = Fixed cost /Contribution per unit = $560,000 / $11 = 50,909 units

Break-even point for the current year in number of video disks = 50,909

Answer 2:

Projected current year sales volume = 260,000 video disks

Projected net income for the current year is $2,300,000

If projected sales volume increases by 20% = 260,000 * 10% = 52,000 units:

Increase in net income = Increase in contribution = 52,000 * 11 =$572,000

Company’s net income for the current year will be = $2,300,000 + $572,000 = $2,872,000

Company’s net income for the current year will be = $2,872,000

Answer 3:

Next year unit purchase price of the video disks will increase by 20 percent to = $6 * (1+20%) = $7.20

If sales prices remains at $19, contribution per unit = $19 - ($7.20 + $2) = $9.80

Contribution margin ratio = 9.80 /19

Sales in dollars required to maintain same profit as projected this year = (Fixed cost + Target profit) /Contribution margin ratio

= ($560,000 + $2,300,000) / (9.80/19) = $5,544,898

Sales in dollars required next year to maintain same profit as projected this year = $5,544,898

Answer 4:

Current year contribution margin ratio = 11/19

Variable cost ratio = 8/19

Variable cost goes up next year to = $9.20

Let us assume, to maintain same contribution margin ratio (hence variable cost ratio), required sales price = X

Hence:

=> 9.20/ X = 8/19

=> X = 19*9.20 / 8 = $21.85

To maintain same contribution margin ratio, required sales price next year = $21.85