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 $3.20 per unit. Enough capacity exists in the company’s plant to produce 30,200 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.02, and fixed expenses associated with the toy would total $52,954 per month.

The company's Marketing Department predicts that demand for the new toy will exceed the 30,200 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,648 per month. Variable expenses in the rented facility would total $2.24 per unit, due to somewhat less efficient operations than in the main plant.

Required:

1. What is the monthly break-even point for the new toy in unit sales and dollar sales.

2. How many units must be sold each month to attain a target profit of $11,520 per month?

3. If the sales manager receives a bonus of 15 cents for each unit sold in excess of the break-even point, how many units must be sold each month to attain a target profit that equals a 27% return on the monthly investment in fixed expenses?

Answer 1

1. Break-even sales (units) = Fixed cost/Contribution margin per unit

= $52,954/($3.20 - $2.02)

= $52,954/$1.18

= 44,876.27 or 44,877 units

Break-even sales dollars = Break-even sales (units) × Selling price per unit

= $44,877 × $3.20

= $143,606

2. Target profit sales units = (Fixed cost + Target profit)/Contribution margin per unit

= ($52,954 + $11,520)/$1.18

= $64,474/$1.18

= 54,639 units

3. Target profit = $52,954 × 27% = $14,298

Variable cost per unit for each units sold in excess of Break-even point = Variable costs + Bonus

= $2.02 + $0.15

= $2.17

Contribution margin = $3.20 - $2.17 = $1.03

Units must be sold each month to earn a return of 22% on the monthly investment in fixed expenses = Break-even sales (units) + Sales unit to reach $14,298 target profit

= 44,877 units + ($14,298/$1.03)

= 44,877 units + 13,881 units

= 58,758 units