Value 1000 Points Disk City Inc - Digital Video Retailer

value1000 Pointsdisk City Inc Is A Retailer For Digital Video Di

Disk City Inc. is a retailer specializing in digital video disks. The company's projected net income for the current year is $2,320,000, based on a sales volume of 230,000 disks, each sold at $19. The variable costs per unit comprise a $5 purchase price and a $2 handling fee, totaling $7 per disk. Fixed costs amount to $440,000 annually. Management anticipates a 30% increase in the purchase price of disks next year. The assignment involves calculating the company's break-even point in units, implications of selecting different models with additional costs, and the effects of changes in costs and sales volume on profitability and break-even points.

Paper For Above instruction

Introduction

Understanding the financial dynamics of a retail business such as Disk City Inc. requires analyzing various cost behaviors, sales strategies, and operational decisions. Key concepts include calculating break-even points, assessing profitability under different scenarios, and understanding the impact of cost changes and capital investments. This paper explores these aspects through detailed calculations and analysis based on the provided data.

Current Year Break-even Analysis

The company's current structure sets the stage for understanding its basic financial threshold—the break-even point. The contribution margin per unit is derived by subtracting the variable costs from the selling price. Specifically, each disk sells for $19, with variable costs of $7 ($5 purchase + $2 handling), yielding a contribution margin of $12. The break-even point in units (BEP) is calculated using the formula:

BEP = Fixed Costs / Contribution Margin per Unit

Applying the data: BEP = $440,000 / $12 ≈ 36,667 disks.

Therefore, Disk City must sell approximately 36,667 disks to cover all fixed and variable expenses, achieving neither profit nor loss.

Impact of Model Selection on Break-even Point

Choosing between different business models involves analyzing how additional costs influence profitability. For Model 6754, assuming the fixed costs and sales volume remain consistent, the net income is calculated by deducting total variable costs and fixed expenses from total sales revenue:

Sales Revenue = Units Sold x Selling Price = 44,000 x $19 = $836,000.

Total Variable Costs = Units Sold x Variable Cost per Unit = 44,000 x $7 = $308,000.

Contribution Margin = Sales Revenue - Variable Costs = $836,000 - $308,000 = $528,000.

Net Income = Contribution Margin - Fixed Costs = $528,000 - $440,000 = $88,000.

In the case of Model 4399, additional equipment costing $450,000 is considered, depreciated over five years via straight-line depreciation ($90,000 per year). The aim is to determine the sales volume needed to generate a net income of $961,000. The fixed costs now include depreciation:

Adjusted Fixed Costs = $440,000 + $90,000 = $530,000.

Required Net Income = $961,000, so total contribution margin must be:

Contribution Margin = Fixed Costs + Net Income = $530,000 + $961,000 = $1,491,000.

Constructing the contribution margin equation:

Total Sales - Total Variable Costs = Contribution Margin,

which simplifies to:

Units Sold x Contribution Margin per Unit = $1,491,000.

Using a contribution margin of $12 per unit (assuming sales price remains $19 and variable costs $7),

Units required = $1,491,000 / $12 ≈ 124,250 units.

Cost-Volume-Profit (CVP) Analysis

Identifying the volume at which total costs of different models are equal involves setting their total cost equations equal and solving for units:

Total cost of Model 6754: Fixed costs + (Variable cost per unit x units).

Total cost of Model 4399: Fixed costs + Equipment depreciation + (Variable cost per unit x units).

Since the models may have different fixed costs, solving for the break-even in these terms provides insight into at what sales volume their total expenses intersect.

Assuming both models share the same fixed costs besides the equipment cost for Model 4399, the cost equality point occurs at the number of units where:

$440,000 + (Variable Cost per Unit x units) = $440,000 + $90,000 + (Variable Cost per Unit x units).

However, since this simplifies equivalently, the larger fixed costs due to equipment signify a higher break-even point for Model 4399, effectively increasing the volume needed for cost parity.

Sensitivity Analysis

Adjusting fixed costs affects contribution margin and break-even units: an increase in fixed administrative costs raises the break-even point because fixed costs are spread over the contribution margin, reducing profitability at a given sales level. Conversely, an increase in the unit contribution margin reduces the number of units needed to break even, enhancing profitability. Similarly, a decrease in units sold necessarily increases the break-even point if sales fall below the threshold, emphasizing the importance of sales volume in maintaining profitability.

Bicycle Shop Cost-Volume-Profit Analysis

Tim's Bicycle Shop sells high-quality and medium-quality bicycles. High-quality bikes sell for $500 with a cost of $275 and a sales commission of $25; medium-quality bikes comprise 75% of sales, sold at a lower price with similar percentage costs. The contribution margin per unit for high-quality bikes is:

$500 - ($275 + $25) = $200.

Medium-quality bikes' contribution margin depends on their sale price and costs, attributable to their proportion of total sales. If we denote the sale price of medium-quality bikes as P, their contribution margin is P - ($P - (cost + commission proportionally adjusted)). The overall contribution margin influences the break-even sales volume, calculated as fixed expenses divided by contribution margin per unit.

The analysis reveals how product mix impacts profitability, emphasizing the importance of maximizing contribution margins and managing fixed costs efficiently.

Conclusion

Financial analysis demonstrates that Disk City Inc. must closely monitor unit costs, sales volume, and fixed expenses to ensure profitability. The impact of operational choices, such as purchasing new equipment or selecting different business models, significantly influences break-even points and net income. Sensitivity to cost variations underscores the necessity for strategic planning and cost control. Proper understanding of contribution margins and CVP analysis aids management in making informed decisions to optimize financial outcomes.

References

• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial & Managerial Accounting (10th ed.). Wiley.
• Needle, D. F. (2013). Business Valuation: A Comprehensive Guide. John Wiley & Sons.
• Drury, C. (2013). Management and Cost Accounting (8th ed.). Cengage Learning.
• Anthony, R., & Govindarajan, V. (2014). Management Control Systems (13th ed.). McGraw-Hill Education.
• Hilton, R. W., & Platt, D. (2013). Managerial Accounting: Creating Value in a Dynamic Business Environment (10th ed.). McGraw-Hill Education.
• Driscoll, P., & Boothe, D. (2019). Principles of Cost Accounting. McGraw-Hill Education.
• Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson.
• Needles, B. E., & Powers, M. (2013). Financial Accounting, Reporting, and Analysis (13th ed.). Cengage Learning.