Question

Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The company’s Marketing Department estimates that demand for the new toy will range between 10,000 units and 40,000 units per month. The new toy will sell for $10.00 per unit. Enough capacity exists in the company’s plant to produce 15,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $6.00 , and incremental fixed expenses associated with the toy would total $32,000 per month. Neptune has also identified an outside supplier who could produce the toy for a price of $5.00 per unit plus a fixed fee of $29,000 per month for any production volume up to 15,000 units. For a production volume between 15,001 and 35,000 units the fixed fee would increase to a total of $58,000 per month. Required: 1. Calculate the break-even point in unit sales assuming that Neptune does not hire the outside supplier. 2. How much profit with Neptune earn assuming: a. It produces and sells 15,000 units. b. It does not produce any units and instead outsources the production of 15,000 unitsto the outside supplier and then sells those units to its customers. 3. Calculate the break-even point in unit sales assuming that Neptune plans to use all of its production capacity to produce the first 15,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 25,000 additional units. 4. Assume that Neptune plans to use all of its production capacity to produce the first 15,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 25,000 additional units. a. What total unit sales would Neptune need to achieve in order to equal the profit earned in requirement 2a? b. What total unit sales would Neptune need to achieve in order to attain a target profit of $30,500 per month? c. How much profit will Neptune earn if it sells 40,000 units per month? d. How much profit will Neptune earn if it sells 40,000 units per month and agrees to pay its marketing manager a bonus of 20 cents for each unit sold above the break-even point from requirement 3? 5. If Neptune outsources all production to the outside supplier, how much profit will the company earn if it sells 40,000 units?

Answer 1

Req 1:	Break-even point in unit sales- Without hiring	8,000	Units
	Working Note 1:
	Break even = Fixed cost / Contribution per unit
	Incremental fixed fee	32,000
	Selling price	10
	Less: Variable cost	6
	Contribution per unit	4
	Break-even point in unit sales- Without hiring	8,000	UNITS
Req 2-a	Profit if produces and sell	28,000
Req 2-b	Profit if outsources production and sells	46,000
		Make and sell(2a)	Buy and sell(2b)
	Sales Revenue	150,000	150,000
	Less: Variable cost	90,000	75,000
	Contribution margin	60,000	75,000
	Less: Fixed cost	32,000	29,000
	Net Income	28,000	46,000
Req 3	Break-even point in unit sales- With hiring	15,200	Units
	For the first 15000 Units
	Contribution per unit	4.0
	Above 15000 Units
	Contribution per unit	5
	Fixed cost For the first 15000 Units	32,000
	Fixed cost for Above 15000 Units	29,000
	Total Fixed cost	61,000
	Less: contribution margin For the first 15000 Units	60,000
	Remaining uncovered cost	1,000
	Divided by CM per unit if hired	200	Units
	Break-even point in unit sales- With hiring	15,200	Units
Req 4-a	Total Units Sales	20,800	Units
	Target Units = (Total Fixed cost + Target Profit)/Contribution per unit
	Total Fixed cost	61,000
	Target Profit	28,000
	Total amount to be covered	89,000
	Less: contribution margin For the first 15000 Units	60,000
	Remaining uncovered cost	29,000
	Divided by CM per unit if hired	5,800
	Total Units Sales	20,800
Req 4-b	Total Units Sales To achieve target profit of $30500	21,300
	Target Units = (Total Fixed cost + Target Profit)/Contribution per unit
	Total Fixed cost	61,000
	Target Profit	30,500
	Total amount to be covered	91,500
	Less: contribution margin For the first 15000 Units	60,000
	Remaining uncovered cost	31,500
	Divided by CM per unit if hired	6,300
	Total Units Sales	21,300
Req 4-c	Net Operating INCOME	124,000
		Make and sell	Buy and sell	Total
	Units	15,000	25,000	40,000
	Sales Revenue	150,000	250,000	400,000
	Less: Variable cost	90,000	125,000	215,000
	Contribution margin	60,000	125,000	185,000
	Less: Fixed cost	32,000	29,000	61,000
	Net Income	28,000	96,000	124,000
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