Question

Prem Narayan, a graduate student in engineering, to market a radical new speaker he had designed for automobile sound systems, founded Acoustic Concepts, Inc. Prem established the company’s headquarters into rented quarters in a nearby industrial park. He hired a receptionist, an accountant, a sales manager, and a small sales staff to sell the speakers to retail stores. Prem asked his accountant, Bob Luchinni, to prepare several cost-volume-profit analyses, using the information shown below.

Sales price for one speaker set................................................... $250 Variable manufacturing cost for each speaker set (direct
materials) ................................................................................... $150 Fixed expenses per month (rent, salaries of receptionist, sales

people, accountant, and Prem)................................................... $35,000 Number of speaker sets sold per month..................................... 400

Based on the above information, how many stereo speaker sets will need to be sold for Acoustic Concepts, Inc., to break even for one month?

Based on the above information, how many stereo speaker sets will need to be sold for Acoustic Concepts, Inc., to earn a $1,000 profit for one month?

What will be the net income or net loss for one month if 400 speaker sets are sold? How about if 425 speakers are sold?

The sales manager feels that a $10,000 increase in monthly advertising will increase monthly sales by $30,000. Would you recommend increasing the advertising budget?

Prem and other management personnel are considering the use of higher-quality components, which would increase variable costs by $10 per speaker. However, the sales manager predicts that the higher overall quality would increase sales to 480 speaker sets per month. Should the higher quality components be used?

The sales manager believes that by reducing the selling price of speakers by $20, and also by increasing the advertising budget by $15,000 per month, that sales will increase to 600 speaker sets per month. Should the changes be made?

The sales manager would like to place the sales staff on a commission basis of $15 per speaker sold, rather than on flat salaries that now total $6,000 per month. The sales manager is confident that the change will increase monthly sales to 460 speaker sets per month. Should the change be made?

Suppose Acoustic Concepts has an opportunity to make a bulk sale of 150 speakers to a wholesaler, if an acceptable price can be worked out. The sale would not disturb the company’s regular sales, nor would if affect fixed operating costs per month. What price should be quoted to the wholesaler if Acoustic Concepts wants to increase its monthly profits by $3,000?

 C.M.=contribution margin, S.P.=sales price, V.C.=variable cost, F.C.=fixed cost

 C.M. per unit = S.P. per unit – V.C. per unit

 The break even point is the point at which the total contribution margin equals fixed costs.

 Break even units sold = F.C. / C.M. Per unit

 Break even sales dollars = F.C. / C.M. Percentage

 C.M. Percentage = C.M. per unit / S.P. per unit, or C.M. (total) / Sales (total)

Answer 1

Selling Price per unit = $250
Variable Costs per unit = $150
Fixed Expenses = $35,000

Contribution Margin per unit = Selling Price per unit - Variable Costs per unit
Contribution Margin per unit = $250 - $150
Contribution Margin per unit = $100

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $100 / $250
Contribution Margin Ratio = 40%

Answer a.

Breakeven Point in unit = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit = $35,000 / $100
Breakeven Point in unit = 350

Answer b.

Required unit sales = (Fixed Expense + Desired Profit) / Contribution Margin per unit
Required unit sales = ($35,000 + $1,000) / $100
Required unit sales = 360

Answer c.

If 400 units are sold:

Net Income (loss) = Contribution Margin per unit * Number of units sold - Fixed Expenses
Net Income (loss) = $100 * 400 - $35,000
Net Income (loss) = $5,000

If 425 units are sold:

Net Income (loss) = Contribution Margin per unit * Number of units sold - Fixed Expenses
Net Income (loss) = $100 * 425 - $35,000
Net Income (loss) = $7,500

Answer d.

Increase in Fixed Expenses = $10,000
Increase in Sales = $30,000

Increase (decrease) in Net Income (loss) = Increase in Sales * Contribution Margin Ratio - Increase in Fixed Expenses
Increase (decrease) in Net Income (loss) = $30,000 * 40% - $10,000
Increase (decrease) in Net Income (loss) = $2,000

Net income will increase by $2,000. So, the manager should increase advertising budget.