Question

Last year Minden Company introduced a new product and sold 25,100 units of it at a price of $95 per unit. The product's variable expenses are $65 per unit and its fixed expenses are $834,300 per year.

Required:

1. What was this product's net operating income (loss) last year?

2. What is the product's break-even point in unit sales and dollar sales?

3. Assume the company has conducted a marketing study that estimates it can increase annual sales of this product by 5,000 units for each $2 reduction in its selling price. If the company will only consider price reductions in increments of $2 (e.g., $68, $66, etc.), what is the maximum annual profit that it can earn on this product? What sales volume and selling price per unit generate the maximum profit?

4. What would be the break-even point in unit sales and in dollar sales using the selling price that you determined in requirement 3?

Answer 1

				25,100
				total	per unit
1)	Sales			2384500	95
	less :Variable cost			1631500	65
	contribution marging			753000	30
	less:fixed expense			834,300
	Net operating income(loss)			-81,300
	net operating loss		-81,300
2)	Break even point in units			27810
	Break even point in dollars			2641950
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit
3)	units		25,100	30,100	35,100	40,100	45,100	50,100	55,100	60,100
	selling price per unit		95	93	91	89	87	85	83	81
	less:Variable expense		-65	-65	-65	-65	-65	-65	-65	-65
	contribution per unit		30	28	26	24	22	20	18	16
	total contribution margin		753000	842800	912600	962400	992200	1002000	991800	961600
	less:fixed expense		-834,300	-834,300	-834,300	-834,300	-834,300	-834,300	-834,300	-834,300
	net operating income(loss		-81300	8500	78300	128100	157900	167700	157500	127300
		Maimum profit			167700
		number of units			50,100
		selling price			85
4)	Break even point in units			41715
	Break even point in dollars			3545775
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit