Question

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 $92 per unit, and variable expenses are $62 per unit. Fixed expenses are $834,300 per year. The present annual sales volume (at the $92 selling price) is 25,400 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 Net Operating Income (loss) :

Operating Income (loss)

($ 72,300)

(2) Present Breakeven Points in Units and Dollars :

Breakeven Points in Units	27,810 Units
Breakeven Points in Dollars Sales	$ 2,558,520

(3)

Maximum Annual Profit	$ 173,700
Number of Units	50,400
Sales price per Unit	$ 82

(4) Revised Breakeven Points in Units and Dollars :

Breakeven Points in Units	41,715 Units
Breakeven Points in Dollars Sales	$ 3,420,630

Working :

(1) Present Net Operating Income :

(a) Sales (25,400 * $ 92)	$ 2,336,800
(b) Variable Expenses (25,400 * $ 62)	1,574,800
(c) Contribution Margin (a - b)	$ 762,000
(d) Fixed Costs	$ 834,300
(e) Operating Income (loss)	($ 72,300)

(2) Breakeven Points in Units and Dollars :

(a) Breakeven Points in Units    = Fixed Cost / Contribution per Unit

= $ 834,300 / ($ 92 - $ 62)

= $ 834,300 / $ 30

= 27,810 Units

(b) Breakeven Points in Units = Breakeven Units * Sales Price per Unit

= 27,810 * $ 92

= $ 2,558,520

(3) Maximum Annual Profit :

Particulars	Sales Price $ 92	Sales Price $ 90	Sales Price $ 88	Sales Price $ 86	Sales Price $ 84	Sales Price $ 82	Sales Price $ 80
(a) Sales Units	25,400	30,400	35,400	40,400	45,400	50,400	55,400
(b) Contrbution per Unit	$ 30	$ 28	$ 26	$ 24	$ 22	$ 20	$ 18
(c) Total Contrubution Margin (a * b)	$ 762,000	$ 851,200	$ 920,400	$ 969,600	$ 998,800	$ 1,008,000	$ 997,200
(d) Fixed Costs	$ 834,300	$ 834,300	$ 834,300	$ 834,300	$ 834,300	$ 834,300	$ 834,300
(e) Operating Income (loss) (c - d)	($ 72,300)	$ 16,900	$ 86,100	$ 135,300	$ 164,500	$ 173,700	$ 162,900

Maximum profit $ 173,700 on sales price @ 82 per Units

(4) Breakeven Point on Sales price @ 82

(a) Breakeven Points in Units    = Fixed Cost / Contribution per Unit

= $ 834,300 / ($ 82 - $ 62)

= $ 834,300 / $ 20

= 41,715 Units

(b) Breakeven Points in Units = Breakeven Units * Sales Price per Unit

= 41,715 * $ 82

= $ 3,420,630

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