Question

The company’s marketing department estimates that the demand for the new toy range between 10 000 units and 40 000 units per month. The new toy will sell for $9.00 per unit. Enough capacity exists in the company’s plan to produce 15 000 units of toys each month. Variable expense to manufacture and sell one unit would be $5.00, and incremental fixed expense associated with the toy would total $32 000 per month.

The business has also identified an outside supplier who could produce the toy for a price of $4.00 per unit plus a fixed fee $29 000 per month for any production volume up to 15 000 units. For production volume between 15 001 and 35 000 units the fixed fee would increase to a total of $58 000 per month.

a) What total unit sales would Neptune need to achieve in order to equal the profit of 28000? Each step shown working out

b). What total unit sales would Neptune need to achieve in order to attain a target profit of $30 500 per month?

Answer 1

Solution:

Given data,

Sales units = 15,000

Selling Price per unit = $9

Variable Cost per unit = $5

Therefore, Contribution per unit = 9 - 5 = $4

Total Contribution = 15,000 * 4 = $60,000

Fixed Expenses = $32,000

a)

Total unit sales would Neptune need to achieve in order to equal the profit of $28,000:

Profit = Contribution - Fixed cost

28,000 = [15,000 * 4 + (x * 5)] - 90,000, Where x = number of units purchased.

x = 11,600 units.

Therefore, total units required to be sold = 15,000 from in-house production + 11,600

= 26,600 units

b)

Total unit sales would Neptune need to achieve in order to equal the profit of $ 30,500

30,500 = [(15,000 * 4) + (x * 5) -90,000]

here x = 12,100

Total units Required to be sold = 15,000 + 12,100 = 27,100 units