Question

Disk City, Inc., is a retailer for digital video disks. The projected net income for the current year is $1,980,000 based on a sales volume of 200,000 video disks. Disk City has been selling the disks for $21 each. The variable costs consist of the $7 unit purchase price of the disks and a handling cost of $2 per disk. Disk City's annual fixed costs are $420,000. 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. (Round your final answer up to nearest whole number.) 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? 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 $21? (Do not round intermediate calculations. Round your final answer to the nearest whole number.) 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? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

1	Break-even point in number of video disks=Fixed cost/Contribution margin per video disk
	Contribution margin per video disk=Selling price-Variable cost=21-(7+2)=21-9=$ 12
	Break-even point in number of video disks=420000/12=35000
2	Unit sales volume=200000*120%=240000
	Net income=Contribution margin-Fixed cost
	Contribution margin=Units sales volume*Contribution margin per video disk=240000*12=$ 2880000
	Net income=2880000-420000=$ 2460000
3	Unit purchase price=7*130%=$ 9.1
	Contribution margin per video disk=Selling price-Variable cost=21-(9.1+2)=21-11.1=$ 9.9
	Sales volume required=(fixed cost+Desired net income)/Contribution margin per video disk=(420000+1980000)/9.9=2400000/9.9=242424.2=242425 video disks
4	Current contribution margin ratio=Contribution margin/Selling price=12/21=0.571429
	Revised variable cost=9.1+2=$ 11.1
	Contribution margin =Selling price-Variable cost
	Contribution margin ratio=(Selling price-Variable cost)/Selling price
	Selling price=x
	0.571429=(x-11.1)/x
	0.571429*x=(x-11.1)
	(1-0.571429)*x=11.1
	0.428571*x=11.1
	x=11.1/0.428571=25.90003=$ 25.90
	Selling price per disk=$ 25.90