Surreal Sound, 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?

(CMA, adapted)