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 $96 per unit, and variable expenses are $66 per unit. Fixed expenses are $830,400 per year. The present annual sales volume (at the $96 selling price) is 25,400 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

				25,400
				total	per unit
1)	Sales			2438400	96
	less :Variable cost			1676400	66
	contribution marging			762000	30
	less:fixed expense			830,400
	Net operating income(loss)			-68,400
	net operating loss		-68,400
2)	Break even point in units			27680
	Break even point in dollars			2657280
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit
3)	units		25,400	30,400	35,400	40,400	45,400	50,400	55,400	60,400
	selling price per unit		96	94	92	90	88	86	84	82
	less:Variable expense		-66	-66	-66	-66	-66	-66	-66	-66
	contribution per unit		30	28	26	24	22	20	18	16
	total contribution margin		762000	851200	920400	969600	998800	1008000	997200	966400
	less:fixed expense		-830,400	-830,400	-830,400	-830,400	-830,400	-830,400	-830,400	-830,400
	net operating income(loss		-68400	20800	90000	139200	168400	177600	166800	136000
		Maimum profit			177600
		number of units			50,400
		selling price			86
4)	Break even point in units			41520
	Break even point in dollars			3570720
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit