Nail Glow, Inc., produces novelty nail polishes. Each bottle sells for $5.90. Variable unit costs are as follows:
Acrylic base ……… $0.86
Bottle, packing material …… $1.15
Pigments …………. 0.57
Selling commission …… 0.14
Other ingredients …… 0.43
Fixed overhead costs are $34,475 per year. Fixed selling and administrative costs are $6,720 per year. Nail Glow sold 35,000 bottles last year.
1. What is the contribution margin per unit for a bottle of nail polish? What is the contribution margin ratio?
2. How many bottles must be sold to break even? What is the break-even sales revenue?
3. What was Nail Glow’s operating income last year?
4. What was the margin of safety in revenue?
5. Suppose that Nail Glow, Inc., raises the price to $6.50 per bottle, but anticipated sales will drop to 28,750 bottles. What will the new break-even point in units be? Should Nail Glow raise the price? Explain.