Question

Problem 5-19 Break-Even Analysis; Pricing [LO5-1, LO5-4, LO5-5] 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 $98 per unit, and variable expenses are $68 per unit. Fixed expenses are $836,100 per year. The present annual sales volume (at the $98 selling price) is 25,800 units. Required: 1. What is the present yearly net operating income or loss?

Answer 1

Answers

• [1]
  Present Yearly net income (loss)
  Net Loss = $ 62,100 or $ (62,100)

A	Sale price per unit	$98
B	Variable cost per unit	$68
C = A- B	Contribution margin per unit	$30
D	Current sales volume	25,800
E = C x D	Total Contribution margin	$774,000
F	Fixed Cost	$836,100
G = E - F	Present yearly Net Operating Income (loss)	($62,100)

• [2]

A	Fixed Cost	$836,100
B	Contribution margin per unit	$30
C = A/B	Present Break Even point in unit sales	27,870
D = C x $ 70	Present Break Even point in dollar sales	$2,731,260

• [3]

Maximum Profits	$179,900
No. of units	50,800
Selling Price	$88

--Working

Unit Sales	Sale price	Variable cost	Contribution margin per unit	Total Contribution margin	Fixed Cost	Net Operating Income (loss)
[A]	[B]	[C]	[D = B - C]	[E = A x D]	[F]	[G = E - F]
25,800	$98	$68	$30	$774,000	$836,100	($62,100)
30,800	$96	$68	$28	$862,400	$836,100	$26,300
35,800	$94	$68	$26	$930,800	$836,100	$94,700
40,800	$92	$68	$24	$979,200	$836,100	$143,100
45,800	$90	$68	$22	$1,007,600	$836,100	$171,500
50,800	$88	$68	$20	$1,016,000	$836,100	$179,900
55,800	$86	$68	$18	$1,004,400	$836,100	$168,300
60,800	$84	$68	$16	$972,800	$836,100	$136,700

• [4]

A	Fixed Cost	$836,100
B	Contribution margin per unit	$20
C = A/B	Break Even point in unit sales	41,805 Answer
D = C x $ 88	Break Even point in dollar sales	$3,678,840 Answer