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

(In the following requirements, ignore income taxes.)

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 $390 000?

d. What is the firm's safety margin?

e. Management estimates that direct labor costs wilt increase by 10 percent next year. Now many units will the company have to sell next year to reach its break-even point?

f. If Divine DVDs' 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?