Question

Disk City, Inc., is a retailer for digital video disks. The projected net income for the current year is $1,980,000 based on a sales volume of 220,000 video disks. Disk City has been selling the disks for $20 each. The variable costs consist of the $7 unit purchase price of the disks and a handling cost of $2 per disk. Disk City’s annual fixed costs are $440,000.

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:
1. 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.)
2. What will be the company’s net income for the current year if there is a 15 percent increase in projected unit sales volume?
3. 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 $20? (Do not round intermediate calculations. Round your final answer to the nearest whole number.)
4. 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

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Disk City
Answer 1	Amount $	Note
Sell price	20.00	A
Less: Variable expenses
Purchase price	7.00	B
Handling cost	2.00	C
Variable cost per unit	9.00	D=B+C
Contribution margin per unit	11.00	E=A-D
Fixed cost	440,000.00	F
Break even units	40,000.00	G=F/E
Answer 2	Amount $
Current Units sold	220,000.00	H
Increase by	15%	I
Increase in units	33,000.00	J=H*I
Contribution margin per unit	11.00	See E
Increase in net income	363,000.00	K=J*E
Current net income	1,980,000.00	L
Revised net income	2,343,000.00	M=K+L
Answer 3	Amount $
Current contribution margin per unit	11.00	See E
Less: Increase in purchase price by 20%	1.40	N=B*20%
Revised contribution margin per unit	9.60	O=E-N
Target net income	1,980,000.00	See L
Add: Total Fixed cost	440,000.00	See F
Target contribution	2,420,000.00	P=L+F
Units to be sold	252,084.00	Q=P/O
Answer 4	Amount $
Current Sell price	20.00	See A
Current contribution margin per unit	11.00	See E
Current contribution margin ratio	55.00%	R=E/A
Current variable cost ratio	45.00%	S=1-R
Current variable cost per unit	9.00	See D
Add: Increase in purchase price by 20%	1.40	See N
Revised variable cost per unit	10.40	T=D+N
Current variable cost ratio	45.00%	See S
Revised selling price	23.11	U=T/S