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 $3.30 per unit. Enough capacity exists in the company’s plant to produce 30,700 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.08, and fixed expenses associated with the toy would total $55,681 per month. The company's Marketing Department predicts that demand for the new toy will exceed the 30,700 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,784 per month. Variable expenses in the rented facility would total $2.31 per unit, due to somewhat less efficient operations than in the main plant. Required: a) What is the monthly break-even point for the new toy in unit sales and dollar sales. b) How many units must be sold each month to attain a target profit of $12,573 per month? c) 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 29% return on the monthly investment in fixed expenses? (For all requirements, Round "per unit" to 2 decimal places, intermediate and final answers to the nearest whole number.)

Answer 1

Answer- Break-even points in units= minimum units sales +additional unit sales

=30,700 units +Additional fixed costs/ Contribution margin per unit for additional unit sales

=30,700 units+$21,011/ $0.99 per unit

=30,700 units +21,223 units

= 51,923 units

Note-1-Determine the additional fixed cost as shown below:-

Details	Amount
Fixed cost first 30,700 units	$55,681
Less:- Contribution margin for first 30,700 units
(30,700 units *$1.22 ) ($3.30-$2.08)	$37,454
Fixed costs to be recovered for first 30,700 units	$18,227
Add: Additional fixed costs	$2,784
Total additional fixed cost	$21,011

Note-2- Determine the contribution margin per unit for first 30,700 units as shown below:-

Contribution margin per unit= Selling price per unit- Variable expenses per unit

=$3.30-$2.08

=$1.22

Note-3-

Determine the contribution margin per unit for additional units as shown below:-

Contribution margin per unit= Selling price per unit- Variable expenses per unit

=$3.30-$2.31

=$0.99

Break-even point in dollars= Break even point in units * Selling price per unit

=51,923 units *$3.30

=$171,346

2-Determine the number of units to be sold to make a profit of $12,573 as shown below:-

Number of units= Break-even point in units +Profit to be earned/ Contribution margin per unit for additional unit sales

=51,923 units +$12,573/ $0.99 per unit

=51,923 units +12,700 units

=64,623 units

3-Determine the number of units to be sold to earn a return of 29% of the monthly investment in fixed expenses as shown below:-

Number of units= Break-even point in units +Profit to be earned/ Contribution margin per unit for additional unit sales

=51,923 units+ 29%* Total fixed cost/ $0.99 per unit -$0.20 per unit

=51,923 units +29% *($55,681+$2,784) / $0.79

=51,923 units + $16,955/ $0.79

=51,923 units + 21,462 units

=73,385 units

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