Question

The marketing department at High-tech Inc. is getting ready to launch a new product. Before doing so, they have to finalize the business case to present to the executives.  The selling price is expected to be $45.  The cost information for the new product is as follows:

Overhead expenses                              $400,000

Advertising                                               $200,000

Raw materials                                         $8.25/unit

Patent royalties                                     $1.85/unit

Sales commission                                 $2/unit

Salesperson salaries                            $475,000

a. What is the contribution margin per unit?

b. What volume must be sold for High-tech Inc. to break even (both in units and dollar)?

c. What is the volume in units that must be sold for the firm to make $600,000 in profit?

d. What happens to the break-even volume if managers decide to reduce the price by 18%?

e. What happens to the break-even volume if extra salespeople need to be hired (with a cost of $45,000)?

Answer 1

A. Contribution= sales - variable expenses

I.e. Contribution margin = contribution/ sales*100

=32.9/45*100= 73.11% --- refer working note

B. Break even point is a point where there is no profit and no loss.

Break even sales (qty)= Contribution/contribution per unit

I.e. =1075000/32.9= 32675 units

Break even sales ($)= contribution/contribution margin

I.e. = 1075000/73.11*100= $1470387

C. units to be sold to earn $600000 profit.

= ( Fixed cost + profit)/ contribution per unit

= (1075000+600000)/32.9= 50912units.

D. If sales price will reduce by 18% i.e. $36.9 per unit , then

Contribution margin will get decrease and break even point will increased.

E. If extra sales persons are hired then fixed cost will get increased, therefore the sales to be increased to attend break even point but there will be no change in break even margin%

Working note:

1. Variable cost= raw material cost p.u.+patents and royalties+sales commission

Variable cost= 8.25+1.85+2= 12.1 p.u.

Fixed cost=. 400000+200000+475000= 1075000