Saturn Game Company manufactures computer games. Last year Saturn sold 25,000 games at $ 50 each. Total costs amounted to $ 1,050,000 of which $ 300,000 were considered fixed. In an attempt to improve its product, the company is considering replacing a component part that has a cost of $ 5 with a new and better part costing $ 9 per unit in the coming year. A new machine would also be needed to increase plant capacity. The machine would cost $ 36,000 with a useful life of six years and no salvage value. The company uses straight- line depreciation on all plant assets. (Ignore income taxes.)

Required:

1. What was Saturn Game Company’s break-even point in number of units last year?

2. How many units of product would the company have had to sell in the last year to earn $ 280,000?

3. If management holds the sales price constant and makes the suggested changes, how many units of product must be sold in the coming year to break even?

4. If the firm holds the sales price constant and makes the suggested changes, how many units of product will the company have to sell to make the same net income as last year?

5. If Saturn Game Company wishes to maintain the same contribution- margin ratio, what selling price per unit of product must it charge next year to cover the increased direct-material cost?

(CMA, adapted)