238 B M A C B 645

Jupiter Game Company manufactures pocket electronic games. Last year Jupiter sold 25,000 games at $25 each. Total costs amounted to $525,000, of which $150,000 were considered fixed.
In an attempt to improve its product, the company is considering replacing a component part chat has a cost of $2.50 with a new and better pail costing $4.50 per unit in the coming year. A new machine also would be needed to increase plant capacity. The machine would Cost $18,000 with a useful life of six years and no salvage value. The company uses straight-line depreciation on all plant assets, (Ignore income (axes.)

Required:
1. What was Jupiter’s break-even point in number of units last year?
2. How many units of product would the company have had to sell in the last year to earn $140,000?
3. If management holds the sales price constant and makes the suggested changes, how many units of product must be sold in the coming year to break even?
4. If the firm holds the sales price constant and makes the suggested changes, how many units of product will the company have to sell to make the same net income as last year?
5. If Jupiter wishes to maintain the same contribution-margin ratio, what selling price per unit of product must it charge next year to cover the increased direct-material cost?

SOLUTION

1. Unit contribution margin = $625,000 - $375,000 / 25,000 units
= $10 per unit

Break-even point (in units) = fixed costs / unit contribution margin
= $150,000 / $10
= 15,000 units 2. Number of sales units required to earn target net profit

= fixed costs + target net profit / unit contribution margin
= $150,000 + $140,000 / $10
= 29,000 units

3. New break-even point (in units) = new fixed costs / new unit contribution margin = $150,000 + ($18,000/6)* / $10 – S2†
= 19,125 units

*Annual straight-line depreciation on new machine
†$2.00 = $4.50 – $2.50 increase in the unit cost of the new part 4. Number of sales units required to earn target net profit, given