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 $94 per unit, and variable expenses are $64 per unit. Fixed expenses are $834,900 per year. The present annual sales volume (at the $94 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

1	Sale (25700 units X $94)	=	$                   24,15,800
Less:	Variable cost (25700 units X $64)	=	$                   16,44,800
	Contribution margin	=	$                      7,71,000
Less:	Fixed cost	=	$                      8,34,900
	Net operating Income / (loss)	=	$                        -63,900
2	Break - even point in units	=	Total Fixed cost / Contribution Margin Per unit
		=	$834900 / ($94-$64)
		=	27,830	units
	Break even point in dollars	=	Break - even point in units X Selling price per unit
		=	27,380 units X $94
		=	$                   26,16,020
3	Selling price per unit	Variable cost per unit	Contribution Margin Per unit	Units	Total Contribution Margin	Fixed Cost	Net operating Income / (loss)
	(a)	(b)	(c) = (a) - (b)	(d) = Increase previous units by 5000	(e) = (c) X (d)	(f)	(e) - (f)
	$                                                        94	$              64	$                                  30	25,700	$   7,71,000	$ 8,34,900	$     -63,900
	$                                                        92	$              64	$                                  28	30,700	$   8,59,600	$ 8,34,900	$       24,700
	$                                                        90	$              64	$                                  26	35,700	$   9,28,200	$ 8,34,900	$       93,300
	$                                                        88	$              64	$                                  24	40,700	$   9,76,800	$ 8,34,900	$   1,41,900
	$                                                        86	$              64	$                                  22	45,700	$ 10,05,400	$ 8,34,900	$   1,70,500
	$                                                        84	$              64	$                                  20	50,700	$ 10,14,000	$ 8,34,900	$   1,79,100
	$                                                        82	$              64	$                                  18	55,700	$ 10,02,600	$ 8,34,900	$   1,67,700
	$                                                        80	$              64	$                                  16	60,700	$   9,71,200	$ 8,34,900	$   1,36,300
	As per the marketing assumptions, Company can generate maximum profit of $179100 at selling price of $84
4	Break - even point in units	=	Total Fixed cost / Contribution Margin Per unit
		=	$834900 / ($84-$64)
		=	41,745	units
	Break even point in dollars	=	Break - even point in units X Selling price per unit
		=	41745 units X $84
		=	$                   35,06,580