Detroit Disk, Inc. is a retailer for digital video disks. The projected net inco
ID: 2423840 • Letter: D
Question
Detroit Disk, Inc. is a retailer for digital video disks. The projected net income for the current year is $2,200,000 based on a sales volume of 270,000 video disks. Detroit Disk has been selling the disks for $24.00 each. The variable costs consist of the $12.00 unit purchase price of the disks and a handling cost of $2.00 per disk. Detroit Disk’s annual fixed costs are $500,000.
Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 20 percent. (Ignore income taxes.)
1. In order to cover a 20 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 Detroit Disk establish for the coming year?
Dillon, Jones, and Kline, Ltd. is studying the acquisition of two electrical component insertion systems for producing its sole product, the universal gismo. Data relevant to the systems follow.
Model A:
Variable costs, $20.00 per unit
Annual fixed costs, $986,200
Model B:
Variable costs, $10.80 per unit
Annual fixed costs, $1,114,000
The selling price is $62 per unit for the universal gismo, which is subject to a 5 percent sales commission. (In the following requirements, ignore income taxes.)
3. Assume Model B requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $400,000 and will be depreciated over a five-year life by the straight-line method. How many units must the company sell to earn $961,000 of income if Model B is selected? As in requirement (2), sales and production are expected to average 41,000 units per year.
4. Ignoring the information presented in part (3), at what volume level will the annual total cost of each system be equal?
Phoenix-based CompTronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 42,000 speaker sets:
Sales
$
3,444,000
Variable costs
861,000
Fixed costs
2,250,000
Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $16.00 per set; annual fixed costs are anticipated to be $1,988,000. (In the following requirements, ignore income taxes.)
1.Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States.
a.Required Dollar Sales (Current Income 333000)
2.Determine the break-even point in speaker sets if operations are shifted to Mexico
3. Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States
a.
If variable costs remain constant, by how much must fixed costs change?
b.
If fixed costs remain constant, by how muuh must unit variable cost change?
Detroit Disk, Inc. is a retailer for digital video disks. The projected net income for the current year is $2,200,000 based on a sales volume of 270,000 video disks. Detroit Disk has been selling the disks for $24.00 each. The variable costs consist of the $12.00 unit purchase price of the disks and a handling cost of $2.00 per disk. Detroit Disk’s annual fixed costs are $500,000.
Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 20 percent. (Ignore income taxes.)
Explanation / Answer
Detroit disk INC
Current contribution margin = 24 - 12 -2 = 10 per unit
Revised purchase price = 12 x 120% = 14.40
Let selling price be = X
X - 14.40 - 2 = 10
X = 26.40
Thus selling price should be = 26.40 per unit
Dillon jones
3. Contribution per unit = 62 -10.80 - 62 x 5%
= 48.10
No .of units to be sold = (1114000 + 80000 + 961000)/48.10
= 44525 units
4. Let no. of units = X
20X + 986200 = 10.80X + 1114000
9.20X = 127800
X = 13891
Thus no. of units at which total cost under both the methods will be equal is = 13891
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