1. Calculate Disk city’s break-even point for the current year in number of video disks — Inc retailer digital projected net income 200 000 based sales volume has

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’s annual fixed costs arc $600,000.

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.

2. What will be the company’s net income for the current year if there is a 10 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 $16?

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?

SOLUTION

1. Break-even point in units, using the equation approach:

$16X – ($10 + $2)X – $600,000 = 0

$4X = $600,000

X = $600,000 / $4 = 150,000 units

2. New projected sales volume = 200,000 × 110%

= 220,000 units

Net income = (220,000)($16 – $12) – $600,000

= (220,000)($4) – $600,000