Question

Detroit Disk, Inc. is a retailer for digital video disks. The projected net income for the current year is $1,660,000 based on a sales volume of 270,000 video disks. Detroit Disk has been selling the disks for $22.00 each. The variable costs consist of the $12.00 unit purchase price of the disks and a handling cost of $2.00 per disk. Detroit Disk’s annual fixed costs are $500,000. 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.)

1. Calculate Detroit Disk’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 Detroit Disk achieve in the coming year to maintain the same net income as projected for the current year if the unit selling price remains at $22.00 but the unit purchase price of the disks increases by 20 percent as expected? (Do not round intermediate calculations and 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 Detroit Disk establish for the coming year? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Answer 1

Solution:
1)	Computation of Break Even Point:
	Selling Price per unit = $22
	Variable Cost per unit = $(12+2) = $14
	So contribution per unit = $(22-14) = $8
	Total Fixed Cost = $500,000
	So the Break Even Unit = (Total Fixed Cost/Contribution per unit) = (500000/8) = 62500 units.
2)	Computation of Net Income
	Particulars	Amount($)
	Sales(270000*1.15*22)	68,31,000.00
	Less: Variable Cost	43,47,000.00
	(270000*1.15*14)
	Contribution	24,84,000.00
	Less: Fixed Cost	5,00,000.00
	Net Income	19,84,000.00
3)	Required Sales for maintaining the same net income:
	Revised Variable cost = (12*1.2)+2 = 16.4 per unit
	So revised contribution per unit = $(22-16.4) = $5.6
	So revised contribution margin = (5.6/22)*100 = 25.4545%
	So desired sales = (Fixed Cost+ Desired Profit)/Revised Contribution Margin
	Desired Sales = (500000+1984000)/.254545 =$9758589
4)	Current Contribution Margin = (8/22)*100 = 36.3636%
	So revised selling price to maintain the same contribution margin:
	Let assume the revised selling price is X
	(X-16.4)/X = .363636
	X = 25.77