Question

Question 2

Hi-tech Company sells 400 computer hard-disks which cost data is as follows:

                                   Per Unit

Selling Price                    $250

Variable costs                 $150

Fixed costs are $35,000 per month.

Required

(a)	What is Hi-tech Company’s expected contribution per unit?
(b)	Calculate the breakeven sales for Hi-tech Company in $ value and in units per month.
(c)	Recently, new competitors have entered the market of digital products. The sales manager proposes that the selling price of hard-disks will be reduced to $235 as to maintain its existing sales volume per month. Discuss how the sales manager’s proposal affects the margin of safety performance.
(d)	The sales manager would like to pay the salesman on commission basis of $15 per disk sold, rather than on fixed salaries of $6,000 per month. The sales manager is confident that the change will increase sales volume by 15%. Should change be made?

Answer 1

A Per Unit Selling Price $250 Variable Cost $150 Expected Contribution Margin $100 B Break Even Sales - Units = Fixed Costs / Contribution Per Unit = $35,000 / $100 = 350 Units Break Even Sales - Value = Fixed Costs / Profit Volume Ratio = $35,000 / 40%* *P/V Ratio Contribution p.u. / Sales Price p.u. = $87500 $100/$250 40% OR = 350 Units* $250 Per Unit $87500

C Present Proposed Per Unit Per Unit Selling Price 250 235 Variable Cost 150 150 Expected Contribution Margin 100 85 Breakeven Sales - Units 350 412 Breakeven Sales - Value 87500 96820 Margin Of Safety - Units Sale units - Break Even Units Sale units - Break Even Units 400-350 400-412 50 -12 Margin Of Safety - Value MOS Units * Sale Price MOS Units * Sale Price 50*$250 -12*$235 $12,500 -$2820 Profit/Loss MOS Units*Contribution p.u. MOS Units*Contribution p.u. 50*100 -12*85 $5,000 -$1,020

In the given proposal margin of safety sales declined below breakeven sales level. Resulting in Loss of $1,020. Proposal should not be accepted. Rather Efforts should be made to maintain the selling price/sales level or reduce the variable cost.

D Proposal Analysis Present - 400UNITS Proposed - 460UNITS* Per Unit Total Per Unit Total Selling Price $250 $1,00,000 $250 $1,15,000 Variable Cost $150 $60,000 $165** $75,900 Expected Contribution Margin $100 $40,000 $85 $39,100 Fixed Costs $35,000 $29,000 Profit $5,000 $10,100 Increase In Profit $5,100 *Proposed Sales 400+15% **Proposed Variable Cost $150+$15 OR Proposal Analysis Increase in Contribution 60*$100 $6,000 Increase in Variable Costs 460*$15 $6,900 Decrease in Fixed Costs $6,000 Increase In Profit $5,100

Change should be made due to incremental profit of $5,100.

Any corrections or queries may be asked for by the students via comments.

I will put my best effort to help resolve the issue.

Thanks.

Nancy Garg.

:)