Question

Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The company’s Marketing Department estimates that demand for the new toy will range between 20,000 units and 35,000 units per month. The new toy will sell for $9.00 per unit. Enough capacity exists in the company’s plant to produce 25,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $5.00 , and incremental fixed expenses associated with the toy would total $32,000 per month.

Neptune has also identified an outside supplier who could produce the toy for a price of $4.00 per unit plus a fixed fee of $69,000 per month for any production volume up to 25,000 units. For a production volume between 25,001 and 55,000 units the fixed fee would increase to a total of $138,000 per month.

Required:

1. Calculate the break-even point in unit sales assuming that Neptune does not hire the outside supplier.

2. How much profit with Neptune earn assuming:

a. It produces and sells 25,000 units.

b. It does not produce any units and instead outsources the production of 25,000 units to the outside supplier and then sells those units to its customers.

3. Calculate the break-even point in unit sales assuming that Neptune plans to use all of its production capacity to produce the first 25,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 10,000 additional units.

4. Assume that Neptune plans to use all of its production capacity to produce the first 25,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 10,000 additional units.

a. What total unit sales would Neptune need to achieve in order to equal the profit earned in requirement 2a?

b. What total unit sales would Neptune need to achieve in order to attain a target profit of $70,500 per month?

c. How much profit will Neptune earn if it sells 35,000 units per month?

d. How much profit will Neptune earn if it sells 35,000 units per month and agrees to pay its marketing manager a bonus of 30 cents for each unit sold above the break-even point from requirement 3?

5. If Neptune outsources all production to the outside supplier, how much profit will the company earn if it sells 35,000 units?

1.	Break-even point in unit sales - without hiring	8,000	units
2a.	Profit if produces and sells	$ 68,000
2b.	Profit if outsources production and sells
3.	Break-even point in unit sales - hiring		units
4a.	Total unit sales		units
4b.	Total unit sales to achieve a target Profit of $70,500		units
4c.	Net operating income
4d.	Net operating income - bonus to marketing manager
5.	Net operating income - fully outsourced

Answer 1

Req 1:	Break-even point in unit sales- Without hiring	8,000	Units
	Working Note 1:
	Break even = Fixed cost / Contribution per unit
	Incremental fixed fee	32,000
	Selling price	9
	Less: Variable cost	5
	Contribution per unit	4
	Break-even point in unit sales- Without hiring	8,000	UNITS
Req 2-a	Profit if produces and sell	68,000
Req 2-b	Profit if outsources production and sells	56,000
		Make and sell(2a)	Buy and sell(2b)
	Sales Revenue	225,000	225,000
	Less: Variable cost	125,000	100,000
	Contribution margin	100,000	125,000
	Less: Fixed cost	32,000	69,000
	Net Income	68,000	56,000
Req 3	Break-even point in unit sales- With hiring	25,200	Units
	For the first 25000 Units
	Contribution per unit	4.0
	Above 25000 Units
	Contribution per unit	5
	Fixed cost For the first 25000 Units	32,000
	Fixed cost for Above 25000 Units	69,000
	Total Fixed cost	101,000
	Less: contribution margin For the first 25000 Units	100,000
	Remaining uncovered cost	1,000
	Divided by CM per unit if hired	200	Units
	Break-even point in unit sales- With hiring	25,200	Units
Req 4-a	Total Units Sales	38,800	Units
	Target Units = (Total Fixed cost + Target Profit)/Contribution per unit
	Total Fixed cost	101,000
	Target Profit	68,000
	Total amount to be covered	169,000
	Less: contribution margin For the first 25000 Units	100,000
	Remaining uncovered cost	69,000
	Divided by CM per unit if hired	13,800
	Total Units Sales	38,800
Req 4-b	Total Units Sales To achieve target profit of $70500	39,300
	Target Units = (Total Fixed cost + Target Profit)/Contribution per unit
	Total Fixed cost	101,000
	Target Profit	70,500
	Total amount to be covered	171,500
	Less: contribution margin For the first 25000 Units	100,000
	Remaining uncovered cost	71,500
	Divided by CM per unit if hired	14,300
	Total Units Sales	39,300
Req 4-c	Net Operating INCOME	49,000
		Make and sell	Buy and sell	Total
	Units	25,000	10,000	35,000
	Sales Revenue	225,000	90,000	315,000
	Less: Variable cost	125,000	40,000	165,000
	Contribution margin	100,000	50,000	150,000
	Less: Fixed cost	32,000	69,000	101,000
	Net Income	68,000 ekkarill92 Next > < Previous Related Solutions Neptune Company has developed a small inflatable toy that it is anxious to introduce to its... Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The company’s Marketing Department estimates that demand for the new toy will range between 15,000 units and 35,000 units per month. The new toy will sell for $3 per unit. Enough capacity exists in the company’s plant to produce 18,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.00, and incremental fixed expenses associated with... Neptune Company has developed a small inflatable toy that it is anxious to introduce to its... Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The company’s Marketing Department estimates that demand for the new toy will range between 10,000 units and 40,000 units per month. 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