Question

Problem 6-19 Break-Even Analysis; Pricing [LO6-1, LO6-4, LO6-5]

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 $98 per unit, and variable expenses are $68 per unit. Fixed expenses are $834,600 per year. The present annual sales volume (at the $98 selling price) is 26,000 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)?

Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO6-1, LO6-3, LO6-4, LO6-5, LO6-6, LO6-8]

Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is direct labor cost.

Last year, the company sold 38,500 of these balls, with the following results:

Sales (38,500 balls)	$	1,175,000
Variable expenses		705,000
Contribution margin		470,000
Fixed expenses		244,000
Net operating income	$	226,000

Required:

1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level.

2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls?

3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $226,000, as last year?

4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs?

5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls?

6. Refer to the data in (5) above.

a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $226,000, as last year?

b. Assume the new plant is built and that next year the company manufactures and sells 38,500 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.

Answer 1

1) Net Operating Income/(Loss) :-

Sales (26000*$98)	$2548000
Less : Variable Expense (26000*$68)	($1768000)
Contribution Margin	$780000
Less : Fixed Expense	($834600)
Net Operating Income/(Loss)	($54600)

2. Break Even Point :-

In Units = Fixed Cost / Contribution Per Unit

= $834600 / $30

= 27820 units

Contribution Per Unit = Sales Price Per unit - Variable expense Per Unit

= $98 - $68

= $30 per unit

In Dollars = Break Even Units * Selling Price Per Unit

= 27820 * $98

= $2726360

3) New Sales Units = 26000 + 5000 = 31000 units

New Selling Price Per Unit = $98 - $2 = $96 Per Unit

New Net Operating Income :-

Selling Price Per Unit	$96
Less : Variable Cost Per Unit	($68)
Contribution Margin Per Unit	$28
Contribution Margin (31000 * $28)	$868000
Less : Fixed Cost	($834600)
Net Operating Income	$33400

4) Break Even Units :-

= Fixed Cost / Contribution Margin Per Unit

= $834600 / $28

= 29807 units

Break Even in Dollars :-

= Break Even Units * Selling Price Per unit

= 29807 * $96

= $2861472

If you are found problem in Question, Reply in Comment Box.

Otherwise, "Please Rate the Answer"