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 $5.50 per unit. Enough capacity exists in the company’s plant to produce 20,000 units of the toy each month. Variable costs to manufacture and sell one unit would be $2.75, and fixed costs associated with the toy would total $70,000 per month.

The company’s Marketing Department predicts that demand for the new toy will exceed the 20,000 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed cost of $5,000 per month. Variable costs in the rented facility would total $3.00 per unit, due to somewhat less efficient operations than in the main plant.

Required:

1. Compute the monthly break-even point for the new toy in units and in total dollar sales. Show all computations in good form.

2. How many units must be sold each month to make a monthly profit of $3,000?

3. If the sales manager receives a bonus of 5 cents for each unit sold in excess of the break-even point, how many units must be sold each month to earn a return of 4.9% on the monthly investment in fixed costs?

Answer 1

1	Contribution margin for 20000 units	Unit	$	Total Value
	Sales Price of New Toy per unit	20000	5.5	110000
	Variable Cost	20000	2.75	55000
	Profit per unit (Excluding fixed cost)	20000	2.75	55000
	Fixed expenses are $70000 for first 20000 units and he will earn the margin of $55000 only excluidng fixed cost
	So need to earn another $15000 ($70000-$15000)
	Break even for Fixed cost of $70000
	$70000/2.75=25225 so he need to take additionl place also for rent
	Contribution margin for above 20000 units		$
	Sales Price of New Toy per unit		5.5
	Variable Cost per unit		3
	Profit per unit (Excluding fixed cost)		2.5
	So break even point above 20000 units is
	$15000+$5000=$20000
	$20000/2.5=8000
	So the total break even point is 28000 units
	Calculation for 28000 units
		Units	$	Total Sales
	Profit per unit (Excluding fixed cost) for 20000 units	20000	2.75	55000
	Profit per unit (Excluding fixed cost) for 8000 units	8000	2.5	20000
	Total Profit			75000
	Less:- total fixed profit ($70000+$5000)			75000
				0
2	For making the profit of $3000
	$3000/2.5=1200 Units
	So company needs to manufacture 28000+1200= 29200 units for $3000 profit
3	Total Fixed Cost $70000+$5000=$75000
	$75000*4.9%=$3675
	So for earning of $3675 need to sales
	$3675/2.45=1500 units (5cent need to pay above break even)
	$1500*.5=$750
	Breack even will be
	($3675+$750)/2.5=1770
	So total break even will be 28000+1770=29770 units