Disk City, Inc. is a retailer for digital video disks. The projected net income
ID: 2704671 • Letter: D
Question
Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $200,000 based on a sales volume of 200,000 video disks. Disk City has been selling the disks for $16 each. The variable costs consist of the $10 unit purchase price of the disks and a handling cost of $2 per disk. Disk City
Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $200,000 based on a sales volume of 200,000 video disks. Disk City has been selling the disks for $16 each. The variable costs consist of the $10 unit purchase price of the disks and a handling cost of $2 per disk. Disk City
Explanation / Answer
1. Profit per disk before fixed costs = sales price - variable costs = 16 - 10 - 2 = $ 4
So total profit before fixed costs = 4*X, where X is no of disks sold
At breakeven, profit before fixed costs should be equal to the fixed costs of 600,000
So 4X = 600,000, or X = 150,000
So breakeven no of disks = 150,000 units
2. If there's a 10% increase in unit sales, then new unit sales = 200,000*(1+10%) = 220,000
So profit before fixed costs = 4*220,000 = 880,000
So net income = 880,000-fixed costs = 880,000-600,000 = 280,000
3. Unit purchase price for next year = 10*(1+30%) = 13
So profit per disk before fixed costs = sales price - variable costs = 16 - 13 - 2 = $ 1
So total profit before fixed costs = 1*X = X, where X is no of disks sold
So net income = X-600,000. This should be equal to 200,000
So X = 600,000+200,000 = 800,000
Volume of sales = 800,000*16 = $ 12,800,000
4. Current contribution margin ratio = profit per disk / sales price = 4/16 = 25%
Let new sales price be P. So profit per disk = P-13-2 = P-15
So new sales price = P = profit per disk / contribution margin ratio = (P-15)/25%
i.e. P = (P-15)/25%, or P = 4(P-15), or P = 20
So selling price = $20
Hope this helped ! Let me know in case of any queries.