GigaCo. manufactures 1-GB flash drives (jump drives). Price and cost data for a relevant range extending to 200,000 units per month are as follows:
Sales price per unit
(current monthly sales volume is 130,000 units) .............................. $ 20.00
Variable costs per unit:
Direct materials........................................................................... 6.20
Direct labour............................................................................... 7.00
Variable manufacturing overhead................................................ 2.00
Variable selling and administrative expenses................................ 1.80
Monthly fixed expenses:
Fixed manufacturing overhead..................................................... $102,300
Fixed selling and administrative expenses.................................... 187,800
Requirements
1. What is the company’s contribution margin per unit? contribution margin percentage? Total contribution margin?
2. What would the company’s monthly operating income be if it sold 160,000 units?
3. What would the company’s monthly operating income be if it had sales of $4,000,000?
4. What is the break-even point in units? In sales dollars?
5. How many units would the company have to sell to earn a target monthly profit of $260,100?
6. Management is currently in contract negotiations with the labour union. If the negotiations fail, direct labour costs will increase by 10% and fixed costs will increase by $22,500 per month. If these costs increase, how many units will the company have to sell each month to break even?
7. Return to the original data for this question and the remaining questions. What is the company’s current operating leverage factor (round to two decimals)?
8. If sales volume increases by 7%, by what percentage will operating income increase?
9. What is the firm’s current margin of safety in sales dollars? What is its margin of safety as a percentage of sales?
10. Let’s say GigaCo. adds a second line of flash drives (2-GB as well as the 1-GB drive). A package of the 2-GB flash drives will sell for $45 and has a variable cost per unit of $28. The expected sales mix is six of the smaller flash drives for every one larger flash drive. Given this sales mix, how many of each type of flash drive will GigaCo. need to sell to reach its target monthly profit of $260,100? Is this volume higher or lower than previously needed (in Requirement 5) to achieve the same target profit? Why?