Question

Question (d) Only: (a)(b)(c) are given and done

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.

(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.

(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