Cost Accounting

December 14, 2017

The famous progressive rock band Fink Ploid is planning to re-release their famous albumTissue Your Earin the United Kingdom. The fixed costs of production will be £150,000 and variable costs of production are £4.30 per CD. One-sixth of the sales price of the album is paid by Fink Ploid for Value-Added Tax (a form of sales tax that is included in the sales price). The income tax rate for corporations like Fink Ploid is 20% of pre-tax profits.
Required:
1. Determine the following:
a. Assuming a sales price of £5.40 per unit, what is the breakeven point, in CDs?
b. Assuming a sales price of £8.40 per unit, what is the breakeven point, in CDs?
2. Assume that Fink Ploid wants to earn an after-tax profit of £70,000. Determine the following:
a. Assuming a sales price of £5.40 per unit, how many CDs will Fink Ploid have to sell to earn the desired profit?
b. Assuming a sales price of £8.40 per unit, how many CDs will Fink Ploid have to sell to earn the desired profit?
3. Fink Ploid expects to sell 1,500,000 CDs if it sets the sale price at £5.00. For every £0.01 increase in sales price, 3,000 fewer CDs will be sold. Determine the following:
a. The profit-maximizing price (all prices are to the nearest £0.01)
b. The amount of profit earned at that price.
4. Assume that Fink Ploid can purchase £30,000 in specialized production equipment that will reduce its production cost £0.05 per CD. Determine the following:
a. The profit-maximizing price
b. The amount of profit earned at that price
c. Should the specialized equipment be purchased? Why or why not?
5. The British government is planning on increasing the rate of value-added tax. Will this increase the breakeven point, decrease the breakeven point, or have no effect on the breakeven point of sales? Why?
6. The British government is planning on reducing the corporation tax rate. Will this increase the breakeven point, decrease the breakeven point, or have no effect on the breakeven point of sales? Why?
7. Fink Ploid is considering offering its customers a limited-edition box set that includes one CD and a special vinyl record that is colored pink. The vinyl record would cost £6.60 and have additional fixed production costs of £40,000. The entire box set would be sold for £30.00 and it is estimated that 10% of customers would purchase the box set instead of the CD alone. Assume that Fink Ploid has chosen not to purchase the specialized production equipment from #4. Determine the following:
a. Assuming a sales price for CDs of £5.40 per unit, what is the breakeven point, in CDs?
b. Assuming a sales price for CDs of £8.40 per unit, what is the breakeven point, in box sets?