Southwest Fly sells competitive Flying Discs. Currently, the product is manufactured in a clean
environment that is very machine intensive.
Last year, the company sold 15,000 of these discs, with the following results:
$ 525,000
($ 420,000)
$ 105,000
($ 135,000)
($ 30,000)
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income (loss)
Required:
1. Compute last year's CM ratio and the break-even point in number of discs.
2. The president feels that the company must raise the selling prices to cover fixed costs. What
selling price per disc (as the same number of units) must it charge next year to cover their
fixed costs, with no change in variable expenses? (round to $0.01)
3. Engineering has been working hard on a new raw material. With this new design, they believe
they can reduce their material costs by 10%. If this change takes place and the selling price
per disc remains constant what will be next year's CM ratio and the break-even units? (round
units up)
4. Refer to the data in (3) above. The President is insistent that the company make operating
income of AT LEAST $25,000. Given this new directive and design, how many discs will have
to be sold next year meet their goal?
5. Refer to the original data in the above table. The company is discussing a move to a
difference location. The new location would reduce variable overhead expense by $3 per disc,
but it would cause fixed expenses per year to increase by $47,000.
a. If they move, what will be the company's new CM ratio and new break-even units?
b. With this new location, how many discs do they need to sell to earn the operating target
goal from #4 the President expects?
