Question

Last year Minden Company introduced a new product and sold 25,700 units of it at a price of $96 per unit. The product's variable expenses are $66 per unit and its fixed expenses are $833,100 per year.

Required:

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?

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?

Maximum annual profit
Number of units	50,700
Selling price per unit	$ 86

Answer 1

1) Calculate net operating income

Sales (25700*96)	2467200
Variable cost	1696200
Contribution margin	771000
Fixed cost	833100
Net income (loss)	-62100

2) Break even unit = 833100/30 = 27770 Units

Break even sales = 833100*96 = $2665920

3) Calculate following

Selling price	Unit	Profit
94	30700	30700*28-833100 = 26500
92	35700	35700*26-833100 = 95100
90	40700	40700*24-833100 = 143700
88	45700	45700*22-833100 = 172300
86	50700	50700*20-833100 = 180900
84	55700	55700*18-833100 = 169500

Maximum annual profit = $180900

Number of units = 50700

Selling price per unit = $86

4) Break even unit = 833100/20 = 41655 Units

Break even sales = 41655*86 = $3582330