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 $98 per unit, and variable expenses are $68 per unit. Fixed expenses are $835,500 per year. The present annual sales volume (at the $98 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

			25,400
			total	per unit
	1)Sales	(25400*98)	2489200	98
	less :Variable cost	(25400*68)	1727200	68
A	contribution marging	(25400*30)	762000	30
B	less:fixed expense	(A-B)	8,35,500
	Net operating income(loss)		-73,500

2	Break even point in units		27850
	Break even point in dollars		2729300

Wn1:BEP(units) = fixed cost/contribution margin per unit

(835500/30)=27850

Wn2:BEP(dollars) = BEP units * selling price per unit

(27850*98) =2729300

3.

X	3)units	25,400	30,400	35,400	40,400	45,400	50,400	55,400	60,400
A	selling price per unit	98	96	94	92	90	88	86	84
B	less:Variable expense	68	68	68	68	68	68	68	68
C=(A-B)	contribution per unit	30	28	26	24	22	20	18	16
D=X.C	total contribution margin	762000	851200	920400	969600	998800	1008000	997200	966400
E	less:fixed expense	8,35,500	8,35,500	8,35,500	8,35,500	8,35,500	8,35,500	8,35,500	8,35,500
F=D-E	net operating income(loss	-73,500	15,700	84,900	1,34,100	1,63,300	1,72,500	1,61,700	1,30,900

Maimum profit		172500
number of units		50,400
selling price		88

4	Break even point in units		41775
	Break even point in dollars		3676200

wn3:BEP(units) = fixed cost/contribution margin per unit

(835500/20)=41775

Wn4:BEP(dollars) = BEP units * selling price per unit

(41775*88) =3676200