Diana Company, a sole proprietorship, sells only one product. The regular price

Question

Diana Company, a sole proprietorship, sells only one product. The regular price is $160. Variable costs are 55% of this selling price, and fixed costs are $8,400 a month. Management decides to decrease the selling price from $160 to $145 per unit. Assume that the cost of the product and the fixed operating expenses are not changed by this pricing decision. (a) At the original selling price of $160 a unit, what is the contribution margin ratio? (b) At the original selling price of $160 a unit, what dollar volume of sales per month is required for Diana Company to break-even? (c) At the original selling price of $160 a unit, what dollar volume of sales per month is required for Diana Company to earn a monthly operating income of $6,500? (d) At the reduced selling price of $145 a unit, what is the contribution margin ratio? (e) At the reduced selling price of $145 a unit, what dollar volume of sales per month is required to break-even?

Explanation / Answer

a. Contribution = selling price - variable cost =160-(55%of160)=160-88=$72 Contribution margin ratio = contribution /sales=45% b. break even point = fixed cost / contribution margin ratio = 8400/45%=$18667 c to earn monthly operating income of $6500 , diana corp must have its contribution to cover fixed cost and desired profit = 8400+6500 =$14900 Desired monthly sales = 14900/45%=$33111 d.At reduced selling price contribution margin ratio = (145-88)/145=39.31% e break even point at SP=145 8400/39.31% =$21374

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