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# Serendipity Sound, Inc.

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Serendipity Sound, Inc. manufactures and sells compact discs. Price and cost data are as follows:

Required:
1. What is Serendipity Sound's break-even point in units?
2. What is the company's break-even point in sales dollars?
3. How many units would Serendipity Sound have to sell in order to earn \$260,000?
4. What is the firm's margin of safety?
5. Management estimates that direct-labor costs will increase by 8 percent next year. How many units will the company have to sell next year to reach its break-even point?
6. If the company's direct-labor costs do increase by 8 percent, what selling price per unit of product must it charge to maintain the same contribution-margin ratio?

#### Solution Preview

Serendipity Sound, Inc. manufactures and sells compact discs. Price and cost data are as follows:

Required:
1. What is Serendipity Sound's break-even point in units?
First, you need to find contribution margin per unit as follows: -
Contribution margin per unit = Sales price per unit - Variable cost per unit
= 25 - 19.80 = 5.20
Break-even point in units = Total Fixed Costs/Contribution per unit
= 468,000/5.20 = 90,000 units
2. What is the company's break-even point in sales dollars?
Break-even point in sales dollars = 90,000 ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer the followings: -
1. What is Serendipity Sound's break-even point in units?
2. What is the company's break-even point in sales dollars?
3. How many units would Serendipity Sound have to sell in order to earn \$260,000?
4. What is the firm's margin of safety?
5. Management estimates that direct-labor costs will increase by 8 percent next year. How many units will the company have to sell next year to reach its break-even point?
6. If the company's direct-labor costs do increase by 8 percent, what selling price per unit of product must it charge to maintain the same contribution-margin ratio?

\$2.19