Dry Air produces mainly residential air conditioners and accessories for air conditioners. One of its main products is the N5 controller. The N5 was produced with a large LCD screen so that seniors and people with poor eyesight could see the functions clearly. In the current year 25,000 units of N5 were sold at $25 each. Total costs amounted to $525,000, of which $150,000 were considered fixed. 

Shirley said to you as you sat down in her office: “The N5 is a great product but we are looking at making it better. We want to replace a component part of it with a newer and better part. This part currently costs $2.50 but the new part will cost us $4.50 per unit. But it will get us more customers and therefore we would also need a new machine to increase our plant capacity. This new machine would cost $180,000 and my accountants have told me that we use a straight line depreciation and the machine would have a useful life of six years with no salvage value, whatever that means.” 

“Now, this is for next year. What are need for this year is for you to work out a few things for me. Firstly, I need to know what the break-even point in units is for this year. I need to make sure I am actually making money from the N5. I also need to know how many I needed to sell to meet my target of $140,000 profit from the N5.” 

As you wrote everything down, Shirley continued: “Make sure you get all that for this year. For next year changes are going to happen and I need you to give me some answers as well.”

“Now, as you know, the N5 is targeted at the seniors market, which means we cannot really change the price of it that much. Now if we made the changes to the component part that I told you about, how many units would we need to sell of the N5 to break even, if we do not increase our prices?” Shirley asked. 

“What about if we wanted to make the same profit as this year? How many units of the N5 do we need to sell?” Shirley continued. “And, one last thing. One of my accountants said something about contribution margin ratio. He said we should try to maintain the same contribution margin ratio as that means we will make the same profit without having to try to sell more, which I take to mean that we will have to increase prices right? So tell me how much we need to increase the price of N5 to, so as to maintain the same contribution margin ratio, taking into account the increased component cost.”

Find: 

1. The break-even point and the number of units of N5 to be sold this year; 
2. The break-even point next year if prices do not change; 
3. The number of units to sell next year to make the same profit as this year; and, 
4. The suggested price so as to maintain the same contribution margin ratio.

Answer rating: 100% (QA)

1 a Breakeven point Fixed Costs contribution per unit Fixed costs 150 000 Variable costs Total costs ... View the full answer