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 $94 per unit, and variable expenses are $64 per unit. Fixed expenses are $835,500 per year. The present annual sales volume (at the $94 selling price) is 26,000 units. Required: 1. What is the present yearly 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-a. 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)? 4-b. Not available in Connect.

Answer 1

ANSWER:-

1)

The contribution format income stat-at k as follows:
Sales(26,000 units * 94 per unit) 2,444,000
Variable expenses 1,664,000
(26,000 units X 64 per unit)
Contribution margin 780,000
Fixed expenses 835,500
Net operating loss 55,500

2)
Calculate break- sen units and sales in dollars:
Unit sales to break even= Fixed expenses / Unit contribution margin
=835,500/32 per unit
=26,109 units

Break even sales dollars =26,109 units x94 per unit
=2,454,281

3)
Create a chart showing the results of the market study. Decrease the selling price in
increments of $2 and increase the volume in increments of 5,000 units. Fixed expenses
remain constant:

Units Selling Units Variable (a) Units Contribution (b) Volume (c) Total Contribution (d) Fixed (c-d)Net Operating
Price ($ ) Expense($) Margin ($) (Units ) Margin($) Expenses ($) Income ($)

94 64 32 26,000 780,000 835,500 55,500
92 64 30 31,000 930,000 835,500 94500
90 64 28 36,000 1,008,000 835,500 172,500
88 64 26 41,000 1,066,000 835,500 230,500   
86 64 24 46,000 1,104,000 835,500 268,500
84 64 22 51,000 1,122,000 835,500 286,500
82 64 20 56,000 1,120,000 835,500 284,500
80 64 18 61,000 1,098.000 835,500 262,500

The maximum profit is $286,500. This level of profit can be earned by selling 51,000
units at a selling gice of 84 per unit.

4)
At a selling gice of 84 per unit, the contribution margin is 22 per unit Therefore:
Unit sales to break even = Fixed expenses / Unit contribution margin
=835, 500/22 per unit
=37,977 units

Break even dollar sales
=37,977 units * 84 per unit
=3,190,090

The change in selling price resulted in a different break -even point. The change resulted
in a drop in the unit contribution margin from 32 to 22, resulting in an increase in the
break-even point