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 $834,300 per year. The present annual sales volume (at the $99 selling price) is 25,600 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

				25,600
				total	per unit
1)	Sales			2534400	99
	less :Variable cost			1766400	69
	contribution marging			768000	30
	less:fixed expense			834,300
	Net operating income(loss)			-66,300
	net operating loss		-66,300
2)	Break even point in units			27810
	Break even point in dollars			2753190
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit
3)	units		25,600	30,600	35,600	40,600	45,600	50,600	55,600	60,600
	selling price per unit		99	97	95	93	91	89	87	85
	less:Variable expense		-69	-69	-69	-69	-69	-69	-69	-69
	contribution per unit		30	28	26	24	22	20	18	16
	total contribution margin		768000	856800	925600	974400	1003200	1012000	1000800	969600
	less:fixed expense		-834,300	-834,300	-834,300	-834,300	-834,300	-834,300	-834,300	-834,300
	net operating income(loss		-66300	22500	91300	140100	168900	177700	166500	135300
		Maimum profit			177700
		number of units			50,600
		selling price			89
4)	Break even point in units			41715
	Break even point in dollars			3712635
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit