Question 5
Dell distributes a high-quality multi-function lap top computer that currently sells for $1,250. Variable costs are $750 per unit and the monthly fixed costs are $160,000. The company's income tax rate is 20% and last month (September) they sold 400 units. (SHOW CALCULATION)
1. Calculate the following: (4 marks)
i. breakeven point in units and in sales revenue
ii. margin of safety in units
iii. operating leverage
2. The sales manager estimates that unit sales will increase by 8% next month. By how much should net income increase in dollars? (3 marks)
3. If the target net income is $84,000, how many units would have to be sold in October to achieve this target? (2 marks)
4. Refer to the original data. The sales manager is convinced that if all of the following changes are implemented next month, units sales will increase by 20%: (6 marks)
i. provide a sales commission of 5% for each computer sold
ii. increase the annual sales salaries by $30,000
iii. increase the monthly advertising budget by $5,000
iv. decrease the unit selling price by $50
Would you agree with the sales managers' changes? (Show calculations)