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 $70 per unit, and variable expenses are $40 per unit. Fixed expenses are $540,000 per year. The present annual sales volume (at the $70 selling price) is 15,000 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?

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)?

Break-even point in units
Break-even point in dollar sales

Answer 1

				15,000
				total	per unit
1)	Sales			1050000	70
	less :Variable cost			600000	40
	contribution marging			450000	30
	less:fixed expense			540,000
	Net operating income(loss)			-90,000
	net operating loss		-90,000
2)	Break even point in units			18000
	Break even point in dollars			1260000
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit
3)	units		15,000	20,000	25,000	30,000	35,000	40,000	45,000	50,000
	selling price per unit		70	68	66	64	62	60	58	56
	less:Variable expense		-40	-40	-40	-40	-40	-40	-40	-40
	contribution per unit		30	28	26	24	22	20	18	16
	total contribution margin		450000	560000	650000	720000	770000	800000	810000	800000
	less:fixed expense		-540,000	-540,000	-540,000	-540,000	-540,000	-540,000	-540,000	-540,000
	net operating income(loss		-90000	20000	110000	180000	230000	260000	270000	260000
		Maimum profit			270000
		number of units			45,000
		selling price			58
4)	Break even point in units			27000
	Break even point in dollars			1566000
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit