Problem 6-2

Keebee, Inc. sells laptops for $1,000 per unit. Variable costs per unit are $400 and monthly fixed costs are $2,400,000. The contribution margin income statement for last month is as follows.

Contribution Margin Income Statement 6,000 units sold
	Per unit	Total	Percent of sales
Sales price	$1,000	$6,000,000	100%
Variable cost	400	2,400,000	40%
Contribution margin	$600	3,600,000	60%
Fixed costs		2,400,000
Profit		$1,200,000
Break-even units = $2,400,000 600 = 4,000 Break-even sales = 4,000 $1,000 = $4,000,000

Scenario A:

1. Assume that the company increases the sales price by 20 percent with no effect on unit variable cost, compute the new unit contribution margin and contribution margin ratio.
2. Given the price increase described in question 1, compute the number of units that must be sold to earn the same profit as last month.

Scenario B:

1. The marketing manager proposes a new marketing campaign for next month. This campaign requires the company to reduce the sales price by 20 percent in order to boost sales. Also, the monthly advertising expense will increase by $600,000. Compute the new unit contribution margin and contribution margin ratio.
2. If the company accepts this campaign, compute the number of units that must be sold to earn the same profit as last month.