If there is a net income of $200,000 based on a sales volume of
200,000 units. The books sell for $16 each; variable costs are the $10
purchase price and a @2 handling cost. The annual fixed costs are
$600,000

What is the break even point in units?

What will be the net income if projected sales volume increases by 10%

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Request for Question Clarification by livioflores-ga on 24 Jul 2005 20:43 PDT

Hi!!

Could you clarify this part of the statement: "variable costs are the $10
purchase price and a @2 handling cost" ?

Thank you.

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Clarification of Question by gofigure99-ga on 24 Jul 2005 20:48 PDT

variable costs consist of the $10 purchase price and a $2 handling cost

Hi!!


Break-even point in Units = Fixed Costs / Contribution margin per unit 

where:
Contribution margin per unit = (Revenues - Variable Costs) / Units sold =
                             = Price per unit - Variable cost per unit


Variable costs per unit = purchase price + handling cost =
                        = $10 + $2 =
                        = $12

Contribution margin per unit = Price per unit - Variable cost per unit =
                             = $16 - $12 =
                             = $4

Break-even point in Units = Fixed Costs / Contribution margin per unit =
                          = $600,000 / $4 =
                          = 150,000 

The  break even point in units is 150,000.


If the projected sales volume increases by 10%, the new sales volume will be:
200,000 * 1.1 = 220,000 ; then the net income will be:

Net Income = Revenues - Expenses = 
           = Revenues - Variable costs - Fixed costs =
           = 220,000*$16 - 220,000*$12 - $600,000 =
           = $280,000

The net income if projected sales volume increases by 10% will be $280,000.


I hope that htis helps you. Feel free to request for a clarification
if you need it.

Regards,
livioflores-ga

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Request for Answer Clarification by gofigure99-ga on 25 Jul 2005 06:48 PDT

how does this change if the unit purchase price of the 		
disks increase by 30 percent. How much dollar sales need to be
achieved to continue the current year's net income if its selling
price remains at $16?

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Clarification of Answer by livioflores-ga on 25 Jul 2005 11:19 PDT

Hi!!

Well, if the unit purchase price of the disks increases by 30 percent
the varible costs per unit will be:
Variable costs per unit = new purchase price + handling cost =
                        = $10*1.3 + $2 =
                        = $15

Contribution margin per unit = Price per unit - Variable cost per unit =
                             = $16 - $15 =
                             = $1


Net Income = Revenues - Expenses = 
           = Revenues - Variable costs - Fixed costs =
           = Units sold * Sale price - Units sold * Variable cost per unit -
             - Fixed costs =
           = Units sold * Contribution margin per unit - Fixed costs =
           
Then, if we want to keep the net income of $280,000:
Units sold = (Net Income + Fixed costs )/Contribution margin per unit =
           = ($280,000 + $600,000)/$1 =
           = 880,000 units.

Sales volume = Units sold * Unit price =
             = 880,000 * $16 =
             = $14,080,000


Hope that this helps you. 

Regards,
livioflores-ga