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 $835,200 per year. The present annual sales volume (at the $93 selling price) is 25,600 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

1. Present yearly net operating income or loss is :

Description	25,600 units	Per unit
Sales	2,380,800	93
Less: Variable Cost	1,612,800	63
Contribution Margin	768,000	30
Less: Fixed Cost	835,200
Operating Income/(loss)	-67,200

2. Present break-even point in unit sales and in dollar sales is:

Description	25,600 units	Per unit
Sales	2,380,800	93
Less: Variable Cost	1,612,800	63
Contribution Margin	768,000	30
Contribution Margin Ratio	32.3%
Less: Fixed Cost	835,200
Operating Income/(loss)	-67,200
Break even sales in dollars (Fixed Cost/Cont Margin ratio)	2,589,120
Break even sales in units (Fixed Cost/Cont Margin per unit)	27,840

3. Maximum annual profit that the company can earn will be:

Description	30,600 units	Per unit
Sales	2,784,600	91
Less: Variable Cost	1,927,800	63
Contribution Margin	856,800	28
Contribution Margin Ratio	30.8%
Less: Fixed Cost	835,200
Operating Income/(loss)	21,600

Units will be 30,600 and selling price per unit will be $91 to arrive at this profit.

4. Break-even point in unit sales and in dollar sales using the selling price determined in (3) above will be:

Description	30,600 units	Per unit
Sales	2,784,600	91
Less: Variable Cost	1,927,800	63
Contribution Margin	856,800	28
Contribution Margin Ratio	30.8%
Less: Fixed Cost	835,200
Operating Income/(loss)	21,600
Break even sales in dollars (Fixed Cost/Cont Margin ratio)	2,714,400
Break even sales in units (Fixed Cost/Cont Margin per unit)	29,829