Question

Serendipity Sound, Inc., manufactures and sells compact discs. Price and cost data are as follows:

Selling price per unit (package of two CDs)	$	25.00
Variable costs per unit:
Direct material	$	10.50
Direct labor		5.00
Manufacturing overhead		3.00
Selling expenses		1.30
Total variable costs per unit	$	19.80
Annual fixed costs:
Manufacturing overhead	$	192,000
Selling and administrative		276,000
Total fixed costs	$	468,000
Forecasted annual sales volume (120,000 units)	$	3,000,000

In the following requirements, ignore income taxes.

Required:
1. What is Serendipity Sound’s break-even point in units? (Do not round intermediate calculations.)
2. What is the company’s break-even point in sales dollars? (Do not round your intermediate calculations.)
3. How many units would Serendipity Sound have to sell in order to earn $260,000? (Do not round intermediate calculations.)
4. What is the firm’s margin of safety?
5. Management estimates that direct-labor costs will increase by 8 percent next year. How many units will the company have to sell next year to reach its break-even point? (Do not round intermediate calculations.)
6. If the company’s direct-labor costs do increase by 8 percent, what selling price per unit of product must it charge to maintain the same contribution-margin ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

1) Break even unit = Fixed cost/CM per unit = 468000/(25-19.80) = 90000 Units

2) Break even sales = 90000*25 = 2250000

3) Required unit = (468000+260000)/5.200 = 140000 Units

4) Margin of safety = 3000000-2250000 = 750000

Margin of safety (%) = 750000/3000000 = 25%

5) Break even unit = 468000/(25-20.20) = 97500 Units

6) CM ratio = (Sales-Variable cost)/Sales

0.208 = (X-20.20)/X

0.208X = X-20.20

-.792X = -20.20

X(Selling price) = 25.51