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 $97 per unit, and variable expenses are $67 per unit. Fixed expenses are $834,000 per year. The present annual sales volume (at the $97 selling price) is 25,700 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

Answer 1
Sales revenue (25700*97)	$        2,492,900
Less: Variable cost (25700*67)	$        1,721,900
Contribution margin	$            771,000
Less: Fixed costs	$            834,000
Net operating income (Loss)	$            (63,000)
Answer 2
Fixed costs	$            834,000
Divided by: Contribution margin per unit (97-67)	$                      30
Break-even point in units	27,800
Break-even point in Dollars (27800*97)	$        2,696,600
Answer 3
Maximum profit	$            180,000
Number of units	50,700
Selling price	$                      87
Answer 4
Fixed costs	$            834,000
Divided by: Contribution margin per unit (87-67)	$                      20
Break-even point in units	41,700
Break-even point in Dollars (41700*87)	$        3,627,900

For Answer 3

Marketing studies
Selling price per unit	$                  97	$                  95	$                  93	$                  91	$                      89	$                      87	$                      85	$                  83
Unit sold	25,700	30,700	35,700	40,700	45,700	50,700	55,700	60,700
Contribution per unit (Selling price per unit - 67)	$                  30	$                  28	$                  26	$                  24	$                      22	$                      20	$                      18	$                  16
Multiply by: Unit sold	25,700	30,700	35,700	40,700	45,700	50,700	55,700	60,700
Total contribution	$        771,000	$        859,600	$        928,200	$        976,800	$        1,005,400	$        1,014,000	$        1,002,600	$        971,200
Less: fixed costs	$        834,000	$        834,000	$        834,000	$        834,000	$            834,000	$            834,000	$            834,000	$        834,000
Net profit	$        (63,000)	$          25,600	$          94,200	$        142,800	$            171,400	$            180,000	$            168,600	$        137,200