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 $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 25,800 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? (Do not round intermediate calculations.)

  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)? (Do not round intermediate calculations.)

Answer 1

1)

Net operating income = Sales – Variable expenses – Fixed expenses= (93*25800) – (63*25800) – 838,500= - 64,500$

2)

Break-even (units) = Fixed costs/(Sales price pu- V.Cost pu) = 838500/(93-63) = 27,950

Break-even ($ sales) = Break-even (units)*Selling price pu = 27950*93 = 2,599,350

3)

Units	Sale price per unit	Sales	V.Costs	Fixed Costs	Net Profit
25,800.00	93	2,399,400.00	1,625,400.00	838,500.00	-   64,500.00
30,800.00	91	2,802,800.00	1,940,400.00	838,500.00	23,900.00
35,800.00	89	3,186,200.00	2,255,400.00	838,500.00	92,300.00
40,800.00	87	3,549,600.00	2,570,400.00	838,500.00	140,700.00
45,800.00	85	3,893,000.00	2,885,400.00	838,500.00	169,100.00
50,800.00	83	4,216,400.00	3,200,400.00	838,500.00	177,500.00
55,800.00	81	4,519,800.00	3,515,400.00	838,500.00	165,900.00
60,800.00	79	4,803,200.00	3,830,400.00	838,500.00	134,300.00
65,800.00	77	5,066,600.00	4,145,400.00	838,500.00	82,700.00
70,800.00	75	5,310,000.00	4,460,400.00	838,500.00	11,100.00
75,800.00	73	5,533,400.00	4,775,400.00	838,500.00	-   80,500.00
80,800.00	71	5,736,800.00	5,090,400.00	838,500.00	- 192,100.00
85,800.00	69	5,920,200.00	5,405,400.00	838,500.00	- 323,700.00
90,800.00	67	6,083,600.00	5,720,400.00	838,500.00	- 475,300.00

From th above table, we can see that the max possible annual profit = 177,500

Units sold = 50,800 @ $83 pu

4)

BEP (units) = 838500/(83-63) = 41,925

BEP ($ sales) = 41,925*83 = $3,479,775