Doorway Compaters Casey Albrecht, VP of Marketing for Doorway Computers, believe

Question

Doorway Compaters Casey Albrecht, VP of Marketing for Doorway Computers, believes the company can se touch-screen laptops next year a $2000per cesspe The VP of Operations tells her that the variable costs of producing each machine will be S production fncility are budgeted at $16.000,000 1,200 and fixed costs for tlve Wek Te' Casey has calculated the unit contribution margin for each machine and the contribution margin ratio. What are they Gor How much gross prafii does she think the computer will make for Doorwa? M vierWhuar is the comyparain o erhy both im dosliar rmsad in wiumber of uits? s Director of Research, I Sleuth, then tells her that their main competitor, Nevolo, is ing to introduce a similar machine for $1,600. If Doorway meets their price, whar will heir ew nit contribution margin be? Ar S1.600, what will be the breakeven unit volume and sales reveruc? Does production of the machine still look like a good idea asey calls Kelly. "We need to cut costs, " she tells her. Kelly suggests that, by eliminating a rented warehouse space, they can reduce fixed cosis few middle managers and cutting down by S2 million. Casey says, "Why didn't we do this anyway?" still sell ours for s breakeven point be. with S14 million in fixed costs? Then Mickey Bell, the CEO, calls her. "We need to make at least S10 million gross profit from this new computer," he says, And we're not making any cuts in fixed costs this ycar. TheyTI stay at S16 million, How mamy will you need to sell and how much revenue will you need? By how much does this exceed breakeven? Now Casey hears from the CFO, Kerr Ching "You're quoting all these numbers, " Kerr warns But have you taken income taxes into account? We need that S10 million profit after taxes and our corporate tax rate is 25%." Now what is the target unit sales volume and target sales revenue? What can Casey do to her plan to ensure the company's profit goal is feasible?

Explanation / Answer

Solution 1:

Selling price of laptop = $2000 per unit

Variable cost per laptop = $1,200 per unit

Unit contribuiton margin = Selling price - variable cost = $2,000 - $1,200 = $800

Contribution margin ratio = contribution margin per unit / Selling price per unit = $800 / $2000 = 40%

Solution 2:

Gross profit = Sales - Cost of goods sold

Cost of goods sold = Varible cost + fixed cost = 30000*1200 + $16,000,000 = $52,000,000

Gross Profit = (30000 * $2,000) - $52,000,000 = $8,000,000

Solution 3:

Breakeven sale units = Fixed cost / contribution per unit = $16,000,000 / $800 = 20000 Laptop

Margin of safety in units = Current sales unit - Breakeven sales units =30000 - 20000 = 10000 laptop

Margin of safety in dollars = Margin of safety units * Selling price per unit = 10000 * $2,000 = $20,000,000

Solution 4:

If selling price is reducedto $1,600 then new unit contribution margin = $1,600 - $1,200 = $400 per unit

Solution 5:

Breakeven sales volume = $16,000,000 / $400 = 40000 laptop

Breakeven sale revenue = 40000 * 1,600 = $64,000,000

Solution 6:

As company can sell only 30000 laptop which is lesser than new breakeven sales units, it means company will be in loss at price of $1,600, therefore production of machine is not a good idea.

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