Question

Disk City, Inc. is a retaller for digital video disks. The projected net Income for the current year is $2,160,000 based on a sales volume of 270,000 video disks. Disk City has been selling the disks for $18 each. The variable costs consist of the $6 unit purchase price of the disks and a handling cost of $2 per disk. Disk City's annual fixed costs are $540,000. Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent. (Ignore Income taxes.) Required: 1. Calculate Disk City'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 20 percent increase in projected unit sales volume? 3. What volume of sales (in dollars) must Disk City achieve in the coming year to maintain the same net income as projected for the current year if the unit selling price remains at $18? (Do not round Intermediate calculations. Round your final answer to the nearest whole number.) 4. In order to cover a 30 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 Disk City establish for the coming year? (Do not round Intermediate calculations. Round your final answer to 2 decimal places.) 54,000 units 1. Break-even point 2. Net income 3. Volume of sales 4. Selling price per disk

Answer 1

Ans:

Ans:

1.

Break even point is the point at which there is no profit and loss and the amount earned by the company in the form of contribution is just enough to cover its fixed Costs.

The formula for Break Even Point is:

Break Even Point = Fixed Cost/Contribution where contribution is Selling Price - Variable Cost

Variable Cost = $6 + $2 = $8

Contribution = $18 - $8 = $10

Fixed Cost =Contribution-Net Profit=(270,000*10)- 2,160,000-=$540,000

Using the values in the Break Even Point Formula:

Break Even Point = 540,000/(10) = 54,000 units

2.

If there's a 20% increase in unit sales, then new unit sales = 270,000*(1+20%) = 324,000

So profit before fixed costs = 10*3240,000 = 3240,000

So net income = 880,000-fixed costs = 3240,000-540,000 = 27,00,000

3.

The Simplified formula for calculating Sales in Dollars is:

Sales in Dollars = [(Fixed Cost + Desired Net Income)/(Contribution Margin)]*Selling Price

Step 1: Calculate Revised Contribution Margin

Revised Contribution Margin = Selling Price - Revised Variable Cost

Revised Variable Cost = Unit Purchase Price*(1+ Increase %) + Handling Cost = 6*(1+30%) + 2 = $9.80

Revised Contribution = $18 - $9.80 = $8.20

Step 2: Calculate Sales in Dollars:

Sales in Dollars = [(540,000+ 2,700,000)/(8.20)]*18 =395121.95*18=$7,112,196

4.

Current contribution margin ratio = profit per disk / sales price = 10/18 = 55.55%

Let new sales price be P. So profit per disk = P-7.8-2 = P-9.8

So new sales price = P = profit per disk / contribution margin ratio = (P-9.8)/55.55%

p=(P-9.8)/55.55%

0.5555p-p=9.8/0.4445=22.047

Selling Price=22.05 Per Disk