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 ) Contribution Margin = Selling Price - Variable cost per unit

( a ) Contribution Margin = $ 250 - $ 150

( a ) Contribution Margin = $ 100.

( b ) Break-even Point in units = Fixed cost / Unit Contribution margin

( b ) Break-even Point in units = $ 35,000 / $ 100

( b ) Break-even Point in units = 350 Units.

( B ) Break even sales = 350 * $ 250

( B ) Break even sales = $ 87,500

( c ) New Contribution margin = $ 235 - $ 150

( c ) New Contribution margin = $ 85.

>> New Break-even sales = $ 35,000 / $ 85

>> New Break-even sales = 412.

>> there will be a loss if the selling price decreases because sales units is less than break even point units.

( d ) New Contribution margin = $ 250 - $ 150 - $ 15

( d ) New Contribution margin = $ 85

>> New Fixed cost = $ 35,000 + $ 6000 = $ 41,000

>> New Break-even Point in units = $ 41,000 / $ 85

>> New Break-even Point in units = 482

>> New Sales units = 400 * 115 %

>> New Sales units = $ 460

>> Sales is less than Break-even sales, so there will be a loss.

If you have any doubts please comment on the answer.