Question

Problem 5-19A Break-Even Analysis; Pricing [LO5-1, LO5-4, LO5-5]

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 $96 per unit, and variable expenses are $66 per unit. Fixed expenses are $835,500 per year. The present annual sales volume (at the $96 selling price) is 25,500 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)?

Problem 5-19A Break-Even Analysis; Pricing [LO5-1, LO5-4, LO5-5] 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 $96 per unit, and variable expenses are $66 per unit. Fixed expenses are $835,500 per year. The present annual sales volume (at the $96 selling price) is 25,500 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

				25,500
				total	per unit
1)	Sales			2448000	96
	less :Variable cost			1683000	66
	contribution marging			765000	30
	less:fixed expense			835,500
	Net operating income(loss)			-70,500
	net operating loss		-70,500
2)	Break even point in units			27850
	Break even point in dollars			2673600
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit
3)	units		25,500	30,500	35,500	40,500	45,500	50,500	55,500	60,500
	selling price per unit		96	94	92	90	88	86	84	82
	less:Variable expense		-66	-66	-66	-66	-66	-66	-66	-66
	contribution per unit		30	28	26	24	22	20	18	16
	total contribution margin		765000	854000	923000	972000	1001000	1010000	999000	968000
	less:fixed expense		-839,100	-839,100	-839,100	-839,100	-839,100	-839,100	-839,100	-839,100
	net operating income(loss		-74100	14900	83900	132900	161900	170900	159900	128900
		Maimum profit			170900
		number of units			50,500
		selling price			86
4)	Break even point in units			41775
	Break even point in dollars			3592650
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit