Cost, Volume, Profit Project Prem Narayan, a graduate student in engineering, to market a radical new speaker he had designed for automobile sound systems, founded Acoustic Concepts, Inc. Prem established the company’s headquarters into rented quarters

Cost, Volume, Profit Project

Prem Narayan, a graduate student in engineering, to market a radical new speaker he had designed for automobile

sound systems, founded Acoustic Concepts, Inc.  Prem established the company’s headquarters into rented quarters

in a nearby industrial park.  He hired a receptionist, an accountant, a sales manager, and a small sales staff to sell the

speakers to retail stores.  Prem asked his accountant, Bob Luchinni, to prepare several cost-volume-profit analyses,

using the information shown below.

Sales price for one speaker set ……………………………………………  $250

Variable manufacturing cost for each speaker set (direct

materials) ……………………………………………………………………….. 

Fixed expenses per month (rent, salaries of receptionist, sales

people, accountant, and Prem) …………………………………………… 

Number of speaker sets sold per month ……………………………….  400  

$150

$35,000

1.Based on the above information, how many stereo speaker sets will need to be sold for Acoustic Concepts, Inc.,

to break even for one month?

2.Based on the above information, how many stereo speaker sets will need to be sold for Acoustic Concepts, Inc.,

to earn a $1,000 profit for one month?

3.What will be the net income or net loss for one month if 400 speaker sets are sold? How about if 425 speakers

are sold?

4.The sales manager feels that a $10,000 increase in monthly advertising will increase monthly sales by $30,000. 

Would you recommend increasing the advertising budget?

5.Prem and other management personnel are considering the use of higher-quality components, which would

increase variable costs by $10 per speaker.  However, the sales manager predicts that the higher overall quality

would increase sales to 480 speaker sets per month.  Should the higher quality components be used?

6.The sales manager believes that by reducing the selling price of speakers by $20, and also by increasing the

advertising budget by $15,000 per month, that sales will increase to 600 speaker sets per month.  Should the

changes be made?

7.The sales manager would like to place the sales staff on a commission basis of $15 per speaker sold, rather than

on flat salaries that now total $6,000 per month.  The sales manager is confident that the change will increase

monthly sales to 460 speaker sets per month.  Should the change be made?

8. Suppose Acoustic Concepts has an opportunity to make a bulk sale of 150 speakers to a wholesaler, if an

acceptable price can be worked out.  The sale would not disturb the company’s regular sales, nor would if affect

fixed operating costs per month.  What price should be quoted to the wholesaler if Acoustic Concepts wants to

increase its monthly profits by $3,000?

·C.M.=contribution margin, S.P.=sales price, V.C.=variable cost, F.C.=fixed cost

·C.M. per unit = S.P. per unit – V.C. per unit

·The break even point is the point at which the total contribution margin equals fixed costs.

·Break even units sold = F.C. / C.M. Per unit

·Break even sales dollars = F.C. / C.M. Percentage

·C.M. Percentage = C.M. per unit / S.P. per unit, or C.M. (total) / Sales (total)