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 $97 per unit, and variable expenses are $67 per unit. Fixed expenses are $838,800 per year. The present annual sales volume (at the $97 selling price) is 25,900 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) presently net operating income (loss)

	Per unit	Total
Revenue	2512300	97
Variable expense	1735300	67
Contribution margin	777000	30
Fixed cost	838800
Net operating income (loss)	-61800

2) Break even unit = 838800/30 = 27960 Units

Break even sales = 27960*97 = $2712120

3) Graph

Selling price	Number of units	Profit
95	30900	30900*28-777000 = 88200
93	35900	35900*26-777000 = 156400
91	40900	40900*24-777000 = 204600
89	45900	45900*22-777000 = 232800
87	50900	50900*20-777000 = 241000
85	55900	55900*18-777000 = 229200

Maximum annual profit = 241000

Number of units = 50900

Selling price per unit = $87

4) Break even unit = 777000/20 = 38850

Break even sales = 38850*87 = $3379950