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

SOLUTION:

(a) Contribution per unit:

Contribution per unit = Selling price per unit - Variable cost per unit

= $ 250 - $ 150

= $ 100

(b) breakeven sales in $ value and in units per month.

Contribution Margin = (Selling price per unit - Variable cost per unit) / Selling price per unit

= ($ 250 - $ 150) / $ 250

= 100 / 250

= 0.4

Breakeven Sales in Value = Fixed Costs / Contribution Margin

= 35000 / 0.4

= $ 87500

Breakeven Sales in units = Fixed Costs / Contribution per unit

= 35000 / 100

= 350 units (Computer Hard disks)

(c) how the sales manager’s proposal affects the margin of safety performance.

When Selling price is $ 250

Margin of Safety = (Current Sales - Breakeven Sales) / Current Sales *100

= {(400*250) - 87500] / (400*250) * 100

= (100000 - 87500) / 100000 * 100

= 12500 / 100000 *100

= 0.125 * 100

= 12.5 %

When Selling Price is $ 235

Contribution Margin = (Selling price per unit - Variable cost per unit) / Selling price per unit

= ($ 235 - $ 150) / $ 235

= 85 / 235

= 0.36

Breakeven Sales in Value = Fixed Costs / Contribution Margin

= 35000 / 0.36

= $ 97222

Margin of Safety = (Current Sales - Breakeven Sales) / Current Sales *100

= {(400*235) - 97222] / (400*235) * 100

= (94000 - 97222) / 94000 * 100

= -3222 / 94000 *100

= -0.0343 * 100

= -3.43 %

When price is reduced to $ 235, Margin of Safety performance becomes negative. Sales are less than breakeven sales which gives loss.