Brown's Compact Disc Store expanded the size of its store in Westfield, NJ two months ago. The owner, Montgomery Brown, has asked you to develop an analysis of the cost structure in his store, as a basis for assessing the profitability of his business. He provides you with account data for the most recent month, which he explains is representative of what these costs are in most months of the year; there is not much seasonality in his business. Last month, May, 890 compact discs were sold. This month Montgomery expects to sell 1,100 CDs. May June Salespersons Wages 2200 1780 Compact Disc Purchases 8250 6675 Rent 1025 1025 Depreciation 40 40 Shopping Bags 22 18 Insurance 75 75 Advertising 65 65 Utilities 125 125 Mr. Brown's Salary 1850 1850 Total 13652 11653 NOTE: Assume that Mr. Brown purchases promptly on a day-to-day basis to replace inventory, so that the level of inventory remains constant.
Required:
(1) Develop the cost equation for Mr. Brown's store, using the account classification method, assuming that the cost object is the individual compact disc.
(2) Mr. Brown plans to increase sales by 25% next month, July, by reducing the price of his compact discs. Assuming a 25% increase in sales, what is the lowest price Mr. Brown can sell his discs for if he wants to meet all costs plus make $1 profit per disc?
(3) What would the profit per disc be if sales actually increased by only 15% and the discs were sold at the price calculated in (2)?