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 $838,200 per year. The present annual sales volume (at the $98 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

1. Contribution margin per unit = $ ( 98 - 68 ) = $ 30.

Present net operating income ( loss ) = Total Contribution Margin - Total Fixed Expenses = 25,500 x $ 30 - $ 838,200 =

$ ( 73,200)

2. Break-even point in unit sales = $ 838,200 / $ 30 = 27,940 units

Break-even point in sales dollars = 27,940 units x $ 98 = $ 2,738,120

3. Answer : $ 171,800. This profit would be generated at a sales volume of 50,500 units at a sales price of $ 88 per unit.

Unit Selling Price	$ 96	$ 94	$ 92	$ 90	$ 88	$ 86
Sales Volume	30,500	35,500	40,500	45,500	50,500	55,500
Sales Revenue	2,928,000	3,337,000	3,726,000	4,095,000	4,444,000	4,773,000
Variable Expenses	2,074,000	2,414,000	2,754,000	3,094,000	3,434,000	3,774,000
Contribution Margin	854,000	923,000	972,000	1,001,000	1,010,000	999,000
Less: Fixed Expenses	838,200	838,200	838,200	838,200	838,200	838,200
Profit ( loss )	$ 15,800	$ 84,800	$ 133,800	$ 162,800	$ 171,800	$ 160,800

4. Break--even number of units = $ 838,200 / $ ( 88 - 68 ) = 41,910 units

Break-even sales dollars = 41,910 units x $ 88 = $ 3,688,080.