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 $839,700 per year. The present annual sales volume (at the $99 selling price) is 25,000 units. 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

3	Unit Sales Price	Unit Variable Expense	Unit Contribution Margin	Volume (Units)	Total Contribution Margin	Fixed Expenses	Net operating income
	$99	$69	$30	25,000	$750,000	$839,700	($89,700)
	97	69	28	30,000	840,000	839,700	300
	95	69	26	35,000	910,000	839,700	70,300
	93	69	24	40,000	960,000	839,700	120,300
	91	69	22	45,000	990,000	839,700	150,300
	89	69	20	50,000	1,000,000	839,700	160,300
	87	69	18	55,000	990,000	839,700	150,300
	85	69	16	60,000	960,000	839,700	120,300
	Thus, the maximum profit is $160,300. This level of profit can be earned by selling 50,000 units at a price of $89 each.
4	At a selling price of $89 per unit, the contribution margin is $20 per unit. Therefore:
	Break-even point in unit sales =			Fixed expenses
				Unit contribution margin
			=	$839,700	= 41,985 units
				$20 per unit
	41,985 units × $89 per unit = $3,736,665 to break even.