Question

A 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 $93 per unit, and variable expenses are $63 per unit. Fixed expenses are $838,500 per year. The present annual sales volume (at the $93 selling price) is 25,700 units.

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? (Do not round intermediate calculations).
Break even point in units: ___________
Break even point 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?
Maximum Profit: __________
Number of Units: __________
Selling Price: __________

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)? (Do not round intermediate calculations).
Break even point in units: ___________
Break even point in dollar sales: ___________

Answer 1

1). Present yearly net loss = $67500
2) Contribution per unit = S.price - Var. cost = 93 - 63 = $30 per unit
Fixed Cost = $838500
Breakeven units = Fixed cost / Cont. per unit = 838500 / 30 = 27950 units
Breakeven sales = 27950 * $93 = $2,599,350
3). From the above table, the highest profit is at the level of 50700 units at selling price of $83 per unit. The profit is $175,500. If we increas further 5000 units the profit will be less than this level Hence it is the highest one.
4). Breakeven sales on selling price of $83 per unit.
Contribution per unit = $83 -63 = $20 per unit
Breakeven units = 838500 / 20 = 41925 units.
Breakeven sales = 41925 * $83 = $3,479,775