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 $91 per unit, and variable expenses are $61 per unit. Fixed expenses are $832,800 per year. The present annual sales volume (at the $91 selling price) is 25,300 units.

Required:

1. What is the present yearly net 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. 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)?

Answer 1

1. Present Yearly Net Operating Income or Loss

2. Present break-even point in unit sales and in dollar sales

                                           = 27,760 Units

                                          = 27,760 * $91

                                          = $25,26,160

3. Calculation of Maximum Annual Profit

So, from the above calculation it is clear that the company will generate maximum profit of $173,200 by selling 50,300 units at the rate of $81 per unit.

4. Break-even point in unit sales and in dollar sales using the selling price determined in (3) above

                                           = 41,640 Units

                                          = 41,640 * $81

                                          = $33,72,840