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)	Break Even (Units) =Total Foxed Cost / Contribution per unit
		Total Fixed Cost	75000
		Contribution per unit	2.5	(5.5-3)
		Break even(Units)	30000	Units
2)	No. of units sold each month to earn profit of $3000
		After break even, contribution earned for each units is equivalent to profit earned for each unit
		Profit to be earned	3000
		Contribution per unit	2.5
		No. of units over break even to gain profit of $3000	1200	(3000/2.5)
		Total Units	4200	(3000 break even + 1200 new)
3)	Total monthly invenstment in FC	75000
	Return required(in %age)	4.90%
	Return required(in $)	3675
	If manager receive bonus of 5% of $5.5 i.e $0.275, contribution after break even will get decreased by $0.275
		Profit to be earned	3675
		Contribution per unit	2.225	(2.5-0.275)
		No. of units over break even to gain profit of $3000	1652
		Total Units	4652	(3000 break even + 1652 new)