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    Cost-Volume-Profit Analysis

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    Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $2,740,000 based on a sales volume of 270,000 video disks. Disk City has been selling the disks for $22 each. The variable costs consist of the $8 unit purchase price of the disks and a handling cost of $2 per disk. Disk City'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 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 answer to the nearest whole number.)

    Break-even point units

    2. What will be the company's net income for the current year if there is a 15 percent increase in projected unit sales volume? (Omit the "$" sign in your response.)

    Net income $

    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 $22? (Do not round intermediate calculations and round your final answer to nearest dollar amount. Omit the "$" sign in your response.)

    Volume of sales $

    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 and round your final answer to nearest dollar amount. Omit the "$" sign in your response.)

    Selling price $

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    Solution Preview

    Required:

    1. Calculate Disk Citys break-even point for the current year in number of video disks. (Round your answer to the nearest whole number.)

    Break-even point units 41,667

    Break-even in units = Total fixed costs/(Sales/unit - variable costs/unit)
    Break-even in units = $500,000/ ($22 - $8 -$2)
    Break-even in units = $500,000/$12
    Break-even in units = 41,666.67 (Rounded to 41,667)

    2. What will be the company's net income for the current year if there is a 15 percent increase in projected unit sales volume? (Omit the "$" sign in your response.)

    Net income $ 3,226,000

    Net income ...

    Solution Summary

    This solution illustrates how to perform various cost-volume-profit analyses and sensitivity analysis.

    $2.19

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