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 $90 per unit, and variable expenses are $60 per unit. Fixed expenses are $834,300 per year. The present annual sales volume (at the $90 selling price) is 25,200 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)	Statement of Operating Income			2)	Break Even in Units = Total Fixed Cost / Contribution margin per unit
						=834300/(90-60)
	Unit Sold	25200					27810	Units
	Selling price	90
	Sales Amount	2268000
	Variable Cost per Unit	60				Break Even in Dollars = Total Fixed Cost / Contribution margin ratio
	Less: variable Cost	1512000				=834300/(33.33%)
							2502900
	Contribution Margin	756000
							Break Even Point in Units	27810
	Less: Fixed Expenses	834300					Break Even Point in Dollars	2,502,900
	Net Operating income/(Loss)	-78300
	Loss	78300

3)	Statement of Operating Income at various level of selling price
							Maximum Profit RANGE
	Unit Sold	25200	30200	35200	40200	45200	50200	55200
	Selling price	90	88	86	84	82	80	78
	Sales Amount	2268000	2657600	3027200	3376800	3706400	4016000	4305600
	Variable Cost per Unit	60	60	60	60	60	60	60
	Less: variable Cost	1512000	1812000	2112000	2412000	2712000	3012000	3312000
	Contribution Margin	756000	845600	915200	964800	994400	1004000	993600
	Less: Fixed Expenses	834300	834300	834300	834300	834300	834300	834300
	Net Operating income/(Loss)	-78300	11300	80900	130500	160100	169700	159300
	Maximum profit	169700
	No. of Units	50200
	Selling PRICE	80

4)	Break Even in Units = Total Fixed Cost / Contribution margin per unit
	=834300/(80-60)
	41715	Units
	Break Even in Dollars = Total Fixed Cost / Contribution margin ratio
	=834300/(25%)
	3337200
	Break Even Point in Units	41,715
	Break Even Point in Dollars	3,337,200