Question

Problem 5-19A Break-Even Analysis; Pricing [LO5-1, LO5-4, LO5-5] Minden Company introduced a new product last year for which it is trying to find an optimal selling price. Marketing studies suggest that the company can increase sales by 5,000 units for each $2 reduction in the selling price. The company’s present selling price is $94 per unit, and variable expenses are $64 per unit. Fixed expenses are $839,400 per year. The present annual sales volume (at the $94 selling price) is 25,800 units. Required: 1. What is the present yearly net operating income or loss? 2. What is the present break-even point in unit sales and in dollar sales? 3. Assuming that the marketing studies are correct, what is the maximum annual profit that the company can earn? At how many units and at what selling price per unit would the company generate this profit? 4. What would be the break-even point in unit sales and in dollar sales using the selling price you determined in (3) above (e.g., the selling price at the level of maximum profits)?

Answer 1

Solution 1:

Present contribution margin per unit = $94 - $64 =$30 per unit

Present yearly net operating income/(Loss) = Contribution margin - Fixed costs = (25800*$30) - $839,400 = ($65,400)

Solution 2:

Present break even point = Fixed cost/contribution margin per unit = $839,400 / $30 = 27980 units

Solution 3:

Lets compute net operating income at different level of sale after considering $2 reduction in selling prices.

Sales Volume	Selling Price	Variable cost per unit	Contribution margin per unit	Total contribution margin	Fixed Cost	Net Operating Income
25800	$94.00	$64.00	$30.00	$774,000.00	$839,400.00	-$65,400.00
30800	$92.00	$64.00	$28.00	$862,400.00	$839,400.00	$23,000.00
35800	$90.00	$64.00	$26.00	$930,800.00	$839,400.00	$91,400.00
40800	$88.00	$64.00	$24.00	$979,200.00	$839,400.00	$139,800.00
45800	$86.00	$64.00	$22.00	$1,007,600.00	$839,400.00	$168,200.00
50800	$84.00	$64.00	$20.00	$1,016,000.00	$839,400.00	$176,600.00
55800	$82.00	$64.00	$18.00	$1,004,400.00	$839,400.00	$165,000.00
60800	$80.00	$64.00	$16.00	$972,800.00	$839,400.00	$133,400.00
65800	$78.00	$64.00	$14.00	$921,200.00	$839,400.00	$81,800.00
70800	$76.00	$64.00	$12.00	$849,600.00	$839,400.00	$10,200.00
75800	$74.00	$64.00	$10.00	$758,000.00	$839,400.00	-$81,400.00

Refer above table,

Maximum profit is $176,600 that company can generate at sales volume of 50800 units and selling price of $84 per unit

Solution 4:

Break even point in units sales = Fixed costs / contribution margin per unit = $839,400 / $20 = 41970 units

Break even sales in dollar = Break even units * Selling price per unit = 41970 * $84 = $3,525,480