Serendipity Sound, Inc. manufactures and sells compact discs. Price and cost data are as follows:

Selling price per unit (package of two CDs) ...............$25.00

Variable costs per unit:

Direct material ..........................$10.50

Direct labor ............................ 5.00

Manufacturing overhead ....................... 3.00

Selling expenses .......................... 1.30

Total variable casts per unit ....................$19.80

Annual fixed costs:

Manufacturing overhead ..................... $ 192,000

Selling and administrative .................... 276,000

Total fixed costs ........................ $468,000

Forecasted annual sales volume (120.000 units) ........... $3,000,000

In the following requirements, ignore income taxes.

Required:

1. What is Serendipity Sound’s break-even point in units?

2. What is the company’s break-even point in sales dollars?

3. How many units would Serendipity Sound have to sell in order to earn $260,000?

4. What is the firm’s margin of safety?

5. Management estimates that direct-labor costs will increase by 8 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 8 percent, what selling price per unit of product must it charge to maintain the same contribution-margin ratio?