Question

Detroit Disk, Inc. is a retailer for digital video disks. The projected net income for the current year is $1,880,000 based on a sales volume of 240,000 video disks. Detroit Disk has been selling the disks for $23.00 each. The variable costs consist of the $11.00 unit purchase price of the disks and a handling cost of $2.00 per disk. Detroit Disk’s annual fixed costs are $520,000.

     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 Detroit Disk’s break-even point for the current year in number of video disks. (Round your final answer up to nearest whole number.)

Break-even point=_________ units

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?
	Net income________

       

3.	What volume of sales (in dollars) must Detroit Disk achieve in the coming year to maintain the same net income as projected for the current year if the unit selling price remains at $23.00 but the unit purchase price of the disks increases by 30 percent as expected? (Do not round intermediate calculations and round your final answer to the nearest whole number.)
	Volume of sales_______

       

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 Detroit Disk establish for the coming year? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Selling Price_______

Answer 1

1)	Break even point in units = Fixed cost/Contribution margin per unit = 520000/(23-13)=	52000
2)	Net income will increase to the extent total contribution margin increases = 240000*20%*10 =	$    4,80,000
3)	Net income as projected = 240000*10-520000 =	$ 18,80,000
	Contribution margin required to get net income of
	of $1880000 = 1880000+520000(Fixed cost) =	$ 24,00,000
	Contribution margin with increase in purchase price = 23-11*130%-2=	$             6.70
	Contribution margin ratio = 6.7/23.0 =	29.13%
	Dollar sales required to maintain net income = Total contribution margin required/CM margin ratio = 2400000*23/6.7 =	$ 82,38,806
	CHECK:
	Net income = 8238806*6.7/23-520000 =	$ 18,80,000
4)	Current contribution margin ratio = 10/23 =	43.48%
	Variable cost ratio = 1-43.48% =	56.52%
	Sales price required = Increased variable cost/Variable cost ratio = 16.3/(13/23) =	$          28.84
	CHECK: CM Ratio = (28.84-16.30)/28.84 =	43.48%