Question

Last year Minden Company introduced a new product and sold 25,300 units of it at a price of $98 per unit. The product's variable expenses are $68 per unit and its fixed expenses are $837,000 per year.

1. What was this product's net operating income (loss) last year?

2. What is the product's break-even point in unit sales and dollar sales?

3. Assume the company has conducted a marketing study that estimates it can increase annual sales of this product by 5,000 units for each $2 reduction in its selling price. If the company will only consider price reductions in increments of $2 (e.g., $68, $66, etc.), what is the maximum annual profit that it can earn on this product? What sales volume and selling price per unit generate the maximum profit?

4. What would be the break-even point in unit sales and in dollar sales using the selling price that you determined in requirement 3?

Answer 1

Answer 1.

Net operating loss

($78,000)

Explanation

Sales (25,300 units * $98)	$2,479,400
Less: Variable expenses (25,300 units * $68)	1,720,400
Contribution margin	759,000
Less: Fixed expenses	837,000
Net operating loss	($78,000)

Answer 2

Break-even point in unit sales	27,900 units
Break-even point in dollar sales	$2,734,200

Explanation :

Break-even point in unit sales = Fixed expenses / Contribution margin per unit

= $837,000 / $30 per unit = 27,900 units.

Break-even point in dollar sales = Break-even point in unit sales * Selling price per unit

= 27,900 units * $98 = $2,734,200.

Answer 3.

Maximum profit	$169,000
Number of units	50,300 units
Selling price	$88 per unit

Explanation :

Unit Selling Price ($)	Unit Variable Exp.($)	Unit Contribution Margin ($)	Units	Total Contribution Margin. ($)	Fixed Exp.($)	Net Income (Loss) ($)
98	68	30	25,300	759,000	837,000	(78,000)
96	68	28	30,300	848,400	837,000	11,400
94	68	26	35,300	917,800	837,000	80,800
92	68	24	40,300	967,200	837,000	130,200
90	68	22	45,300	996,600	837,000	159,600
88	68	20	50,300	1,006,000	837,000	169,000
86	68	18	55,300	995,400	837,000	158,400
84	68	16	60,300	964,800	837,000	127,800
82	68	14	65,300	914,200	837,000	77,200
80	68	12	70,300	843,600	837,000	6,600

Thus we can see from the above table that maximum profit that can be earn is $169,000 by selling 50,300 units at a selling price of $88 per unit.

Answer 4

Break-even point in unit sales	41,850 units
Break-even point in dollar sales	$3,682,800

Explanation :

Break-even point in unit sales = Fixed expenses / Contribution margin per unit

= $837,000 / $20 per unit = 41,850 units.

Break-even point in dollar sales = Break-even point in unit sales * Selling price per unit

= 41,850 units * $88 = $3,682,800