Disk City, Inc. is a retailer for digital video disks. The projected net income
ID: 2362949 • Letter: D
Question
Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $2,840,000 based on a sales volume of 270,000 video disks. Disk City has been selling the disks for $16 each. The variable costs consist of the $2 unit purchase price of the disks and a handling cost of $2 per disk. Disk City’s annual fixed costs are $400,000.Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent. (Ignore income taxes.)
Calculate Disk city’s break-even point for the current year in number of video disks. (Round your answer to the nearest whole number.)
What will be the company’s net income for the current year if there is a 20 percent increase in projected unit sales volume? (Omit the "$" sign in your response.)
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 $16? (Do not round intermediate calculations and round your final answer to nearest dollar amount. Omit the "$" sign in your response.)
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 and round your final answer to nearest dollar amount. Omit the "$" sign in your response.)
Explanation / Answer
Total Var cost pu = $2+$2 = $4 SP pu = $16 So COnt pu = 16-4 = 12 So for 270,000 disk, Total COnt = 270,000*$12 = $3,240,000 Less Fixed costs $400,000 ---------------------------------- Net Income = 28,40,000 ----------------------------- CM Ratio = Total Cont/Sales = 3240000/(16*270000) = 75%......A BEP at current year = Total FC/COnt pu = 400000/12 = 33,333 Disks ......Ans (1) If Sales Vol inreases by 20%, New Sales nos = 270000*1.20 = 324,000 So Total Cont = 324,000*$12 = $3,888,000 Less FC $400,000 -------------------------- Revised Net Inc = $3,488,000........................Ans (2) Coming Year : Revised pur price of DIsk = 1.30*$2 = $2.60 Total Var cost pu = $2.60+$2 = $4.60 SP pu = $16 So COnt pu = 16-4.60 = 11.40 No of disks sold = ??? Reqd Net Income is $2,840,000 = Total Cont - FC = No of disks*Cont pu - FC ie $2,840,000 = No fo disk*$11.40 - 400,000 ie No of Disks = ($2,840,000 + 400000)/$11.40 = 284,211 So Sales $$$ Reqd is No of disk*SP pu = 284,211*$16 = $4,547,376 .....Ans (3) From 'A' above, Current CM Ratio is 75% ie CM Ratio = Cont pu/SP pu = (SP-4.60)/SP pu = 75% ie SP pu - 4.60 = 75%*SPpu ie 0.25*SP pu = 4.60 So SP pu = 4.60/0.25 = $18.4 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, selling price per disk must Disk City establish for the coming year is $18.40 .........................Ans (4)