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 per unit. Enough capacity exists in the company’s plant to produce 16,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.25, and fixed expenses associated with the toy would total $35,000 per month. The company's Marketing Department predicts that demand for the new toy will exceed the 16,000 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $1,000 per month. Variable expenses in the rented facility would total $1.40 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 $12,000 per month?

3. If the sales manager receives a bonus of 10 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 25% return on the monthly investment in fixed expenses?

Answer 1

1)

Break-even point in units =

Minimum units sale + (additional unit sale/Contribution margin per unit)

= 16000+8000/(3-1.40)

= 16000+5000

= 21000 units

Note Additional fixed cost

Contribution for the additional unit will be 1.6(3-1.4) because after 16000 unit variable cost is 1.4

Break-even Point in sales $ =

Breakeven Units * sales price

=21000*3

=$ 63000

2) How many units must be sold each month to attain a target profit of $12,000 per month?

No of Units = Break-even units + (desired profit)/ contribution per unit

= 21000+ (12000)/1.6

= 21000+7500

= 28500 units

3)

New variable cost = 1.40+0.10

= 1.5

contribution per unit above 16000 unit = 3-1.5 = 1.5

desired profit = 36000*25%

= 9000

No of units required to 9000 profit = 21000+(9000/1.5)

=21000+6000

= 27000 units

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