Disk City Inc: Retailer For Digital Video Disks

Disk City Inc Is A Retailer For Digital Video Disks The Projected N

Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $1,840,000 based on a sales volume of 230,000 video disks. Disk City has been selling the disks for $23 each. The variable costs consist of the $11 unit purchase price of the disks and a handling cost of $2 per disk. Disk City’s annual fixed costs are $460,000. 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.)
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.)
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 $23? (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "$" sign in your response.)
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 2 decimal places. Omit the "$" sign in your response.)

Sample Paper For Above instruction

Disk City Inc., a retailer specializing in digital video disks, operates in a competitive environment that necessitates careful financial planning. As the company prepares for the upcoming year, management considers various scenarios impacting profitability, including cost increases and sales volume changes. This paper analyzes key financial metrics: the current year's break-even point, projected net income following sales volume increases, required sales revenue to sustain current profit levels, and appropriate pricing strategies to accommodate rising costs. These analyses provide insights into operational leverage, cost control, and pricing strategies vital for maintaining profitability amid changing market conditions.

First, the current break-even point is determined by analyzing fixed and variable costs relative to unit selling price and contribution margin. The contribution per unit is calculated by subtracting total variable costs from the selling price. Specifically, variable costs per disk consist of the purchase price ($11) plus handling costs ($2), totaling $13. The contribution margin per disk is $23 minus $13, which equals $10. Therefore, the break-even volume in units is calculated by dividing total fixed costs ($460,000) by the contribution margin per unit ($10), resulting in 46,000 disks (rounded to the nearest whole number). This indicates that Disk City must sell at least 46,000 disks annually to cover all fixed costs.

Next, we evaluate the impact of a 15 percent increase in unit sales volume on net income. The initial net income is projected at $1,840,000 with 230,000 units sold. A 15 percent increase in sales volume results in 264,500 units sold (230,000 × 1.15). With a constant contribution margin per unit, the increase in contribution margin is proportional to the increase in units sold. The additional contribution margin is (264,500 - 230,000) × $10 = $34,500. Adding this to the initial net income, the new net income becomes $1,840,000 + $34,500 = $1,874,500. Arithmetically, however, since fixed costs remain unchanged and variable costs scale with sales, the net income reflects increased contribution margins, confirming the expected profit improvement.

For the third requirement, maintaining the current net income of $1,840,000 requires calculating the necessary sales volume in dollars at the current selling price of $23 per disk. Total contribution margin per unit remains $10, so total contribution margin needed is fixed costs ($460,000) plus desired net income ($1,840,000), totaling $2,300,000. Dividing by the contribution margin per unit ($10) gives the required units: $2,300,000 / $10 = 230,000 units, corresponding to total sales revenue of 230,000 × $23 = $5,290,000. To maintain the same profit level, Disk City must achieve sales of $5,290,000.

The final analysis involves adjusting the selling price to offset a 30 percent increase in the unit purchase price, while maintaining the current contribution margin ratio. The current contribution margin ratio is ($23 - $13) / $23 ≈ 0.4348. To preserve this ratio after costs increase, the new unit purchase cost rises from $11 to $14.3 ($11 × 1.30). The fixed contribution margin per unit, based on the current sales price, must be scaled to maintain the ratio: contribution margin = selling price − variable costs. Setting the new variable cost to $14.3, and solving for the selling price (P), we get P − $14.3 = 0.4348 P, leading to P ≈ $28.84. This new selling price aligns with the goal of preserving contribution margin ratio amid rising costs, ensuring profitability stability in the upcoming year.

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