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 $99 per unit, and variable expenses are $69 per unit. Fixed expenses are $831,300 per year. The present annual sales volume (at the $99 selling price) is 25,300 units.

Required:
1.	What is the present yearly net operating income or loss?
	ANSWER: Net Operating Income of $73,200

  

2.	What is the present break-even point in unit sales and in dollar sales?
	ANSWER: Break-Even Point in Units: 27,710 ANSWER: Break-Even Point in Dollar Sales: 2,743, 290

  

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?
	STUCK

  

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)?
	STUCK

Answer 1

Solution

Minden Company

1. Determination of the present yearly net operating income or loss at 25,300 units:

Unit sales price                        $99

Unit variable cost                    $69

Unit contribution margin        $30

Total contribution margin       $759,000         ($30 x 25,300 units)

Less: Fixed cost                      $831,300

Net operating loss                   ($72,300)

1. Determination of the maximum annual profit that the company can earn and the number of units and the selling price per unit assuming the marketing studies are correct:

Sensitivity Analysis
Unit Selling Price	Unit Variable Cost	Unit Contribution Margin	Sales Volume (Units)	Total CM	Fixed Expenses	Net Operating Profit
$99	$69	$30	25,300	$759,000	$831,300	($72,300)
$97	$69	$28	30,300	$848,400	$831,300	17,100
$95	$69	$26	35,300	$917,800	$831,300	$86,500
$93	$69	$24	40,300	$967,200	$831,300	$135,900
$91	$69	$22	45,300	$996,600	$831,300	$165,300
$89	$69	$20	50,300	$1,006,000	$831,300	$174,700
$87	$69	$18	55,300	$995,400	$831,300	$164,100

From the above table, we observe that the contribution margin and net operating profit are maximum at sales volume of 50,300 units with the corresponding unit selling price of $89.

Hence, the desired number of units          50,300

The desired selling price                           $89

Maximum profit                                        $174,700

1. Determination of the break-even point in unit sales and in dollar sales using the selling price of $89:

Break-even point in unit sales = fixed expenses/contribution margin per unit

Fixed expenses = $831,300

Contribution margin = selling price – variable cost

At the selling price of $89, and variable cost of $69

CM = $89 - $69 = $20

Break-even point in units = $831,300/$20 = 41,565 units

Break-even point in dollar sales = Fixed expenses/CM Ratio

CM ratio = (unit CM/unit selling price) x 100

CM ratio = ($20/$89) x 100 = 22.47%

Break-even point in dollar sales = $831,300/22.47% = $3,699,285