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 $831,600 per year. The present annual sales volume (at the $99 selling price) is 25,700 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

Contribution margin per unit = Sales per unit - Variable expenses per unit = 99-69 = $30 per unit

Total Contribution margin = Annual sales volume × Contribution margin per unit = 25,700×30 = $771,000

1. Present yearly net operating income (loss) = Total Contribution margin - Fixed expenses = 771,000-831,600 = $(60,600)

2. Present break even point in unit sales = Fixed expenses ÷ Contribution margin per unit = 831,600÷30 = 27,720 units

Present break even point in dollar sales = Fixed expenses × Sales per unit ÷ Contribution margin per unit = 831,600×99÷30 = $2,744,280

3. New sales volume = 25,700+5,000 = 30,700

New selling price per unit = 99-2 = $97

	Per unit	Total
Sales	97	2,977,900
Variable expenses	69	(2,118,300)
Contribution margin per unit	$28	$859,600
Less: Fixed expenses		(831,600)
Net operating income (loss)		$28,000

4. New break even point in unit sales = Fixed expenses ÷ Contribution margin per unit = 831,600÷28 = 29,700 units

New break even point in dollar sales = Fixed expenses × Selling price per unit ÷ Contribution margin per unit = 831,600×97÷28 = $2,880,900