Question

Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $2,210,000 based on a sales volume of 290,000 video disks. Disk City has been selling the disks for $20 each. The variable costs consist of the $9 unit purchase price of the disks and a handling cost of $2 per disk. Disk City’s annual fixed costs are $400,000.

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.)

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.)

1. What will be the company’s net income for the current year if there is a 20 percent increase in projected unit sales volume?
2. 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.)
3. 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.)

	1. Break-even point units 2. Net income 3. Volume of sales 4. Selling price per disk

Answer 1

Given data :

Projected NET income for the Current Year = $ 2,210,000

Projected Sales Volume for Current Year= 290,000

Selling Price per unit = $ 20

Purchase price p.u. = $ 9

Handling cost p.u = $ 2

Thus, Contribution per unit = $ 9

Annual Fixed Cost = $ 400,000

Therefore, Break even point for current year = Fixed Costs/ Contribution p.u

= 400,000/ 9

= 44,445 units (approx.)

Company’s net income for the current year if there is a 20 percent increase in projected unit sales volume:

Sales volume = 290000 + 20%

= 348,000 units

Total contribution would be = 348,000 * 9 = 3,132,000

Net income = contribution - fixed costs

= 3,132,000 - 400,000

= 2,732,000

Now, Volume of sales (in dollars) that Disk City must 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:

Projected NET income for the current year is $ 2,210,000

Therefore, contribution required is 2,210,000+400,000 = 2,610,000

Since it is said that purchase price per unit would increase by 30% in the upcoming year, therefore the purchase price per unit would now be 9+30% = $ 11.7 per unit

Therefore, total variable cost per unit would be 11.7+ 2 i.e., 13.7

Contribution per unit would be 20 - 13.7 = 6.3

Therefore volume of sales = 2,610,00/ 6.3

= 414286 units

Thus sales volume (in dollars) = $ 8,285,720

Now, 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, the selling price per disk, that Disk City must establish for the coming year would be calculated as below:

Let the sales price per unit be 'x'

Contribution Margin Ratio = Contribution/ Sales Revenue *100

Current contribution margin ratio = 9/20*100

= 45%

Therefore,

(x- 13.7)/ x * 100 = 45%

X = 25

Therefore, selling price per disk would be $ 25

To summarise, answers are as follows :

1. Break-even point units = 44,445 units

2. Net income = $ 2,732,000

3. Volume of sales =$ 8,285,720

4. Selling price per disk = 25