Question

This Company produces a single product. Sales for the current year are 25,000 units.
Relevant data:
Selling price/unit		130
Variable cost/unit		80
Fixed costs		1,300,000
a)	What is their net income for the current year?
b)	Compute their breakeven point in sales units.
c)	Marketing Director believes that unit sales would increase by 20% if the price were cut by 10%.
	Should they take this action? Explain.
d)	Production Manager is considering outsourcing the production of some parts. This would reduce fixed
	costs to $1,000,000, but increase variable cost/unit to $100.
	What would the breakeven point be if this action were taken?

Answer 1

Answer a.
Income Statement
Sales - 25,000 Units X $130	3,250,000.00
Variable Cost - 25,000 Units X $80	2,000,000.00
Contribution Margin	1,250,000.00
Fixed Costs	1,300,000.00
Net Income	(50,000.00)
Answer b.
Contribution Per Unit = $130 - $80 = $50
BEP (In Units) = Fixed Costs / Contribution Margin per Unit
BEP (In Units) = $1,300,000 / $50
BEP (In Units) = 26,000 Units
Answer c.
Income Statement
Sales - 30,000 Units X $117	3,510,000.00
Variable Cost - 30,000 Units X $80	2,400,000.00
Contribution Margin	1,110,000.00
Fixed Costs	1,300,000.00
Net Income	(190,000.00)
Sales in Units = 25,000 Units X 120% = 30,000 Units
New SP per Unit = $130 X 90% = $117
The Company should not decrease there Selling Price, as it will increase their Loss from $50,000 to $190,000.
Answer d.
New Contribution per Unit = $130 - $100 = $30 per Unit
New Fixed Cost = $1,000,000
BEP (In Units) = Fixed Costs / Contribution Margin per Unit
BEP (In Units) = $1,000,000 / $30
BEP (In Units) = 33,333.33 or say 33,334 Units (Approx.)