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 $3.00 per unit. Enough capacity exists in the company’s plant to produce 30,900 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.90, and fixed expenses associated with the toy would total $50,485 per month. The company's Marketing Department predicts that demand for the new toy will exceed the 30,900 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,524 per month. Variable expenses in the rented facility would total $2.10 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 $11,430 per month?

3. If the sales manager receives a bonus of 20 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 30% return on the monthly investment in fixed expenses?

Answer 1

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Neptune Company
Breakeven point is that level of sales volume where the company neither incurs loss nor incurs any profits.
Current net income/loss of Neptune Company
Sales (30900*3)	92,700.00
Less: Variable cost (30900*1.90)	58,710.00
Contribution margin	33,990.00
Less: Fixed costs	50,485.00
Net loss	(16,495.00)
So it can be seen that at 30,900 units of sales level the company is making losses. So this loss has to be make up from the rental space. The total contribution margin it should earn should be $ 16,495 plus fixed rent of the facility.
So Target contribution from rental facility will be:
Net loss	16,495.00
Add: Rent	2,524.00
Target contribution	19,019.00
Contribution margin from rental facility
Sales	3.00
Less: Variable cost	2.10
Contribution margin per unit	0.90
Target contribution	19,019.00
Units to be sold	21,132.00
Answer 1
So Total units to be sold will be (30,900 + 21,132)= 52,032 to reach break even.
Answer 2
Target contribution from rental facility:
Net loss	16,495.00
Add: Rent	2,524.00
Add: Target Profit	11,430.00
Target contribution	30,449.00
Contribution margin per unit	0.90
Units to be sold	33,832.00
Answer 2
So Total units to be sold will be (30,900 + 33,832)= 64,732 to make profit of $ 11,430.
Answer 3
Monthly investment in fixed expenses
Fixed expenses for toy	50,485.00
Add: Rent	2,524.00
Monthly investment	53,009.00
Return at 30%	15,903.00
This is Target contribution
Revised Contribution margin:
Sales	3.00
Less: Variable cost	2.10
Less: Bonus	0.20
Contribution margin per unit	0.70
Target contribution	15,903.00
Units to be sold	22,719.00	52,032.00
So Total units to be sold will be (52,032 +22,719)= 74,751
52,032 is the breakeven units calculated in answer 1.
	50,485.00
	2,524.00
	53,009.00
	15,903.00
	3.00
	2.10
	0.60
	0.30
	15,903.00
	53,010.00