Surreal S ound, Inc., manufactures and sells compact disks. Price and cost data are as follows:
Selling price per unit (package of two CDs) ................................................................................................. $ 25.00
Variable costs per unit:
Direct material ...................................................................................................................................... $ 8.20
Direct labor .......................................................................................................................................... 4.00
Manufacturing overhead ....................................................................................................................... 6.00
Selling expenses ................................................................................................................................... 1.60
Total variable costs per unit ............................................................................................................... $ 19.80
Annual fixed costs:
Manufacturing overhead ....................................................................................................................... $ 288,000
Selling and administrative ..................................................................................................................... 414,000
Total fixed costs ................................................................................................................................ $ 702,000
Forecasted annual sales volume (140,000 units) ........................................................................................ $3,500,000
In the following requirements, ignore income taxes.
Required:
1. What is Surreal Sound’s break-even point in units?
2. What is the company’s break-even point in sales dollars?
3. How many units would Surreal Sound have to sell in order to earn $390,000?
4. What is the firm’s margin of safety?
5. Management estimates that direct-labor costs will increase by 10 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 10 percent, what selling price per unit of product must it charge to maintain the same contribution-margin ratio?