Question

Problem 6-25 Changes in Fixed and Variable Costs; Break-Even and Target Profit Analysis [LO6-4, LO6-5, LO6-6]

Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $2.60 per unit. Enough capacity exists in the company’s plant to produce 30,300 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.66, and fixed expenses associated with the toy would total $42,223 per month.

The company's Marketing Department predicts that demand for the new toy will exceed the 30,300 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,111 per month. Variable expenses in the rented facility would total $1.82 per unit, due to somewhat less efficient operations than in the main plant.

Required:

1. What is the monthly break-even point for the new toy in unit sales and dollar sales.

2. How many units must be sold each month to attain a target profit of $9,594 per month?

3. If the sales manager receives a bonus of 25 cents for each unit sold in excess of the break-even point, how many units must be sold each month to attain a target profit that equals a 23% return on the monthly investment in fixed expenses?

(For all requirments, Round "per unit" to 2 decimal places, intermediate and final answers to the nearest whole number.)

Answer 1

			units
			30300	in excess of normal capacity
			CM	CM
	Sales		2.6	2.6
	less:
	Variable expense		1.66	1.82
	Contribution margin		0.94	0.78
	fixed expense		42,223	2,111	44,334
1	Break even point in unit sales				50623	units
	Break even point in dollar sales				131620
2	unit sales needed to attain target profit				62923	units
3	unit sales needed to attain target profit				24258
1)	Fixed cost for intital 30300 units					42,223
	Contribution	30300	*	0.94		28482
	Remaining fixed cost					13,741
	monthly rent for addittional spalce					2,111
	total fixed cost covered by remaining sales					15,852
	Contribution on excess capacity					0.78
	units to break even remaining fixed cost					20323.08
	total units to break even					50623
2)	target profit					9,594
	Contribution on excess capacity					0.78
	units to break even remaining fixed cost					12300
3)	Target profit
	total fixed cost					44,334
	Return					29%
	Target profit					12857
	new contribution		(less bonus )			0.53
	units needed to break even					24258