Question 1

Selling price per unit..................$25.00

Variable costs per unit:

Direct material.............$8.20

Direct labor....................$4.00

Manufacturing overhead.......$6.00

Selling costs................................$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

Forecast annual sales (140 000 units)...............$3 500 000

Refer to the data given. Now assume that Divine DVDs pay income taxes of 30 percent.

Required:

a. What is Divine DVDs' break-even point in units?

b. What is the company's break-even point in sales dollars?

c. Now many units would Divine DVDs have to sell in order to earn a profit of $400 000 after tax?

d. What is the firm's safety margin?

e. If Divine DVDs' direct labor costs increase by 10 percent, what selling price per unit of product must it charge to maintain the same contribution margin ratio?