Question

The company’s marketing department estimates that the demand for the new toy range between 10 000 units and 40 000 units per month. The new toy will sell for $9.00 per unit. Enough capacity exists in the company’s plan to produce 15 000 units of toys each month. Variable expense to manufacture and sell one unit would be $5.00, and incremental fixed expense associated with the toy would total $32 000 per month.

The business has also identified an outside supplier who could produce the toy for a price of $4.00 per unit plus a fixed fee $29 000 per month for any production volume up to 15 000 units. For production volume between 15 001 and 35 000 units the fixed fee would increase to a total of $58 000 per month.

a) How much profit will Neptune earn if it sales 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 of 21000? above profit is $95000

Answer 1

Option 1: Purchasing 35000 toys (Supplier full capacity) and producing 5000 toys

Sr. No.	Particulars	Amount
1.	Sales of toys (40000 units*9 per unit)	360000
	Purchases of toys (35000 units * 4 per unit + 58000)	-198000
	Production of balance toys ( 5000 units *5 + 32000)	- 57000
	Sales commission ((40000 -21000) units *0.2 per unit)	- 3800
	Profit	101200

It is beneficial for Company to sell 35000 units as producing and selling additional 5000 units is giving a loss of 5000*(9-5)-32000 = -12000

Option 2  Purchasing 25000 toys and producing 15000 toys (full capacity)

Sr. No.	Particulars	Amount
1.	Sales of toys (40000 units*9 per unit)	360000
	Purchases of toys (25000 units * 4 per unit + 58000)	-158000
	Production of balance toys ( 15000 units *5 + 32000)	-107000
	Sales commission ((40000 -21000) units *0.2 per unit)	- 3800
	Profit	91200

Option 1 is more profitable that to with avoiding inhouse production i.e purchasing and selling 35000 toys profit will be 35000*(9-4)-58000 - (35000-21000)*0.2 = 114200 $