Question

Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The company’s Marketing Department estimates that demand for the new toy will range between 10,000 units and 40,000 units per month. The new toy will sell for $8.00 per unit. Enough capacity exists in the company’s plant to produce 15,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $4.00 , and incremental fixed expenses associated with the toy would total $32,000 per month.

Neptune has also identified an outside supplier who could produce the toy for a price of $3.00 per unit plus a fixed fee of $29,000 per month for any production volume up to 15,000 units. For a production volume between 15,001 and 35,000 units the fixed fee would increase to a total of $58,000 per month.

Required:

1. Calculate the break-even point in unit sales assuming that Neptune does not hire the outside supplier.

2. How much profit with Neptune earn assuming:

a. It produces and sells 15,000 units.

b. It does not produce any units and instead outsources the production of 15,000 units to the outside supplier and then sells those units to its customers.

3. Calculate the break-even point in unit sales assuming that Neptune plans to use all of its production capacity to produce the first 15,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 25,000 additional units.

4. Assume that Neptune plans to use all of its production capacity to produce the first 15,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 25,000 additional units.

a. What total unit sales would Neptune need to achieve in order to equal the profit earned in requirement 2a?

b. What total unit sales would Neptune need to achieve in order to attain a target profit of $30,500 per month?

c. How much profit will Neptune earn if it sells 40,000 units per month?

d. How much profit will Neptune earn if it sells 40,000 units per month and agrees to pay its marketing manager a bonus of 20 cents for each unit sold above the break-even point from requirement 3?

5. If Neptune outsources all production to the outside supplier, how much profit will the company earn if it sells 40,000 units?

I need help with all 5 questions. Thanks!

Answer 1

Solutions:

Solution 1:
Unit selling price	8.00
Less: Unit variable cost	4.00
Contribution margin per unit	4.00
Fixed expenses	32000
Divided by: Contribution margin per unit	4.00
Break-even point in unit sales	8000
Solution 2a:
Units produced and sold	15000
Contribution margin (units*Contribution margin per unit)	60000
Less: Fixed expenses	32000
Net profit	28000
Solution 2b:
Units purchased from outside supplier	15000
*Purchase price	3
Variable Purchase cost from outside supplier	45000
Sales revenue (units* sales price)	120000
Less: Variable Purchase cost	45000
Less: Fixed Fee	29000
Net profit	46000
Solution 3:
Total Fixed expenses (own + Fixed fee)    (32000+58000)	90000
Less: contribution from own production	60000
Contribution required from outside suppliers	30000
/ Contribution margin per unit from outside supplier ($8 -$3)	5.00
Units required to buy from outside supplier	6000
Add: Units from own production	15000
Break-even point in unit sales	21000
Solution 4a:
Desired profit (as per requirement 2a)	28000
Add: Total Fixed expenses (own + fixed fee)	90000
Total contribution required	118000
Less: contribution from own production	60000
Contribution required from outside suppliers	58000
/ Contribution margin per unit from outside supplier ($8 -$3)	5.00
Units required to buy from outside supplier	11600
Add: Units from own production	15000
Unit sales required	26600
Solution 4b:
Desired profit	30500
Add: Fixed expenses	90000
Total contribution required	120500
Less: contribution from own production	60000
Contribution required from outside suppliers	60500
/ Contribution margin per unit from outside supplier ($8 -$3)	5.00
Units required to buy from outside supplier	12100
Add: Units from own production	15000
Unit sales required	27100
Solution 4c:
Contribution from own production	60000
Contribution margin from outside suppliers (25000*5)	125000
Total contribution	185000
Less: fixed costs	90000
profit will Neptune earn if it sells 40,000 units per month	95000
Solution 4d:
profit will Neptune earn if it sells 40,000 units per month	95000
Less: commission paid to marketing manager [(40000-21000)*0.20]	3800
Net profit after commission paid	91200
Solution 5:
Sales units	40000
/ Contribution margin per unit from outside supplier ($8 -$3)	5.00
Contribution margin	200000
Less: Fixed expenses	58000
Net profit	142000