Question

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 $3.30 per unit. Enough capacity exists in the company’s plant to produce 30,600 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.08, and fixed expenses associated with the toy would total $55,498 per month.

The company's Marketing Department predicts that demand for the new toy will exceed the 30,600 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,775 per month. Variable expenses in the rented facility would total $2.31 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 $12,078 per month?

3. If the sales manager receives a bonus of 15 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 27% return on the monthly investment in fixed expenses?

Answer 1

Solution 1:
Normal Contribution Margin per unit
Selling Price	$3.30
Other Variable Cost	$2.08
Contribution per Unit	$1.22
Contribution Margin from Rented Space
Selling Price	$3.30
Other Variable Cost	$2.31
Contribution per Unit	$0.99
Computation of Break Even Point
Current Fixed Costs	$55,498
Less: Recovered by Current Contribution margin (30600*1.22)	$37,332
Unrecovered Fixed Cost	$18,166
Add: Additional Fixed Cost	$2,775
Total additional fixed costs to be Recovered	$20,941
/ Contribution margin Per Unit from rented space	$0.99
Additional Number of Units	21153
Total Breakeven Units (30600 + 21153)	51753
Breakeven Point in Dollares(Break even units*$3.30)	$170,783
Soltuion 2:
Computation of Total Units to be sold
Total additional fixed costs to be Recovered	$20,941
Add: Desired Profit	$12,078
Additional Contribution	$33,019
Contribution Margin per Unit	$0.99
Additional Number of Units	33353
Total units to be Sold (30600 + 33353)	63953
Solution 3:
Computation of New Contribution margin per unit
Variable Cost	$2.31
Add: Bonus	$0.15
Total Variable Cost	$2.46
Selling Price	$3.30
New Contribution Margin per Unit	$0.84
Compuattion of Total units to be sold
Total Fixed Investment (55498+2775)	$58,273
Desired Profit(Fixed Investment * 27%)	$15,734
New Contribution margin per Unit	$0.84
Number of Units (Desired profit*New contr. Margin per unit)	18731
Total units to be Sold(51753+18731)	70483