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 $94 per unit, and variable expenses are $64 per unit. Fixed expenses are $835,500 per year. The present annual sales volume (at the $94 selling price) is 25,200 units.

Required:

1. What is the present yearly 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-a. 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)?

4-b. Not available in Connect.

Answer 1

1) Present net operating income (loss)

	Total	Per unit
Sales	2368800	94
Variable cost	1612800	64
Contribution margin	756000	30
Fixed cost	835500
Net income (loss)	-79500

2) Break even unit = 835500/30 = 27850 Units

Break even sales = 27850*94 = $2617900

3) Calculate following

Selling price	Unit	Profit
92	30200	30200*28-835500 = 10100
90	35200	35200*26-835500 = 79700
88	40200	40200*24-835500 = 129300
86	45200	45200*22-835500 = 158900
84	50200	50200*20-835500 = 168500
82	55200	55200*18-835500 = 158100

So maximum selling price = $84; Unit sale = 50200; Profit = 168500

4a) Break even unit = 835500/20 = 41775 Units

Break even sales = 41775*84 = $3509100