Question

Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $3.50 per unit. Enough capacity exists in the company’s plant to produce 30,300 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.20, and fixed expenses associated with the toy would total $58,585 per month.

The company's Marketing Department predicts that demand for the new toy will exceed the 30,300 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,929 per month. Variable expenses in the rented facility would total $2.45 per unit, due to somewhat less efficient operations than in the main plant.

2. How many units must be sold each month to attain a target profit of $13,020 per month?

Answer 1

Answer:

Target Profit   = $13,020

Contribution Margin = Total Fixed costs + Target Profit                                                                  =   $58,585 + $2,929 + $13,020                                                                  =   $74,534

Required Contribution   = $74,534 (-) Contribution for 30,300 units                                                   = $74,534 (-) [30,300 x ($3.50 (-) $2.20)]                                                   = $74,534 (-)   $39,390                                                   =      $35,144

Units Required to earn desired profit   = $35,144 / ($3.50 (-) $2.45)                                                                                 = $35,144 / $1.05                                                                                 =   33,470

units must be sold each month to attain a target profit   = 30,300 + 33,470                                                                                                                   =    63,770

units must be sold each month to attain a target profit     = 63,770 units