Chapter 7, Problem 7.60BE

Comprehensive CVP analysis (Learning Objectives 1, 2. 3. 4, & 5)

Gamma Manufacturing manufactures 256GB SD cards (memory cards for mobile phones, digital cameras, and other devices). Price and cost data for a relevant range extending to 200,000 units per month are as follows:

Requirements

1. 1. What is the company’s contribution margin per unit? Contribution margin percentage? Total contribution margin?
2. 2. What would the company’s monthly operating income be if the company sold 130,000 units?
3. 3. What would the company’s monthly operating income be if the company had sales of $4,500,000?
4. 4. What is the breakeven point in units? In sales dollars?
5. 5. How many units would the company have to sell to earn a target monthly profit of $259,700?
6. 6. Management is currently in contract negotiations with the labor union. If the negotiations fail, direct labor costs will increase by 10% and fixed costs will increase by $23,500 per month. If these costs increase, how many units will the company have to sell each month to break even?
7. 7. Return to the original data for this question and the rest of the questions. What is the company’s current operating leverage factor (round to two decimals)?
8. 8. If sales volume increases by 7%, by what percentage will operating income increase?
9. 9. What is the company’s current margin of safety in sales dollars? What is its margin of safety as a percentage of sales?
10. 10. Say the company adds a second size of SD card (512GB in addition to 256GB). A 512GB SD card will sell for $50 and have variable cost per unit of $28 per unit. The expected sales mix is four of the 256GB SD cards for every one of the 512GB SD cards. Given this sales mix, how many of each type of SD card will the company need to sell to reach its target monthly profit of $259,700? Is this volume higher or lower than previously needed (in Question 5) to achieve the same target profit? Why?