Question

Problem 5-25A Changes in Fixed and Variable Expenses; Break-Even and Target Profit Analysis [LO5-4, LO5-5, LO5-6] 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 $2.50 per unit. Enough capacity exists in the company’s plant to produce 30,700 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.60, and fixed expenses associated with the toy would total $40,945 per month. The company's Marketing Department predicts that demand for the new toy will exceed the 30,700 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,047 per month. Variable expenses in the rented facility would total $1.75 per unit, due to somewhat less efficient operations than in the main plant. 1. Compute the monthly break-even point for the new toy in unit sales and in dollar sales. (Round "per unit" to 2 decimal places, intermediate and final answers to the nearest whole number.) 2. How many units must be sold each month to make a monthly profit of $9,600? (Round "per unit" to 2 decimal places, intermediate and final answer to the nearest whole number.) 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 earn a return of 22% on the monthly investment in fixed expenses? (Round "per unit" to 2 decimal places, intermediate and final answer to the nearest whole number.)

Answer 1

Selling price of toy (per unit)	$2.5
Variable expenses in main plant (per unit)	$1.6
Contribution per unit (2.5-1.6)	$0.9
Fixed expenses of main plant	$40,945
Units of toy produced in main plant	$30,700
calculate how much fixed expenses are covered by selling 30700 units	$27,630	30700*0.9
fixed expenses of main plant left to be covered(40,945-27,630)	$13315
Now take rented plant
Fixed expenses	$2,047
Variable expense(PER UNIT)	$1.75
Contribution per unit(2.5-1.75)	$0.75
fixed expenses to be covered(2,047+13315)	$15,362
Units to be sold for covering this fixed expenses (15362/0.9)	$17068.8
total Break Even point in units of toys(30,700+17068.8)	$47,768.889
Break Even point in dollar sales(47,768.889*2.5)	$119422.22
2.
we know that Break Even Point in units is 47768.889 units
But for earning profit of $9600 we need to be sold units produced in rented plan thus;(9600/0.9)	$10,666.667
total Units to be sold($47,768.889+10666.67)	$58,435.55

3.

First of all know 22% return on fixed expenses.
Total fixed expenses($40,945+2,047)	$42992
22% return(42992*0.22)	$9458.24
total amount of fixed expense of $42992 is covered by selling 47,768.889 units.
we have to cover amount of profit 9458.24
In this case Contribution under rented plant is $0.9 per unit, but as sales manager will receive 22% bonus of every unit sold thus (2.5 x 22 / 100) = $0.55 per unit.
now contribution will be (0.9 – 0.55) = $0.35 per unit
Thus units to be sold for covering amount of profit 9458.24(9458.24/0.35)	27023.54
total units to be sold(27023.54+47,768.889 )	$74,792.43