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 $94 per unit, and variable expenses are $64 per unit. Fixed expenses are $834,300 per year. The present annual sales volume (at the $94 selling price) is 25,400 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)

sales (94 * 25400)	2387600
- variable cost ( 64 * 25400 )	(1625600)
Contribution (30* 25400)	76200
- Fixed expense	(834300)
Net operating loss	(72300)

2) Break even sales unit = Fixed expense / contribution per unit

834300/(94-64) = 27810 units

break even Sales value = Sales units * selling price = 27810 * 94 = 2614140

3)

Sales units (A)	Contribution margin (b)	A * B
25400	94-64 = 30	762000
30400	92 - 64 = 28	851200
35400	90-64 = 26	920400
40400	88-64 = 24	969600
45400	86-64 = 22	998800
50400	84 - 64 = 20	1008000

If we go further then 55400 * (82-64) = 997200

Hence maximum contribution is at 50400 units .

4) Sales value at 3 = 50400 units * 84 = 4233600

contribution when selling price is 84 = 84 - 64 = 20 per unit

Hence break even sales quantity = total fixed expense / contribution per unit = 834300 / 20 = 41715 units and the sale value = 41715 * 84 = 3504060