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 $95 per unit, and variable expenses are $65 per unit. Fixed expenses are $839,400 per year. The present annual sales volume (at the $95 selling price) is 25,400 units.

Required:
1.	What is the present yearly net 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.	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)?

Answer 1

--All working forms part of the answer

--Requirement 1

A	Sale price per unit	$95
B	Variable cost per unit	$65
C = A- B	Contribution margin per unit	$30
D	Current sales volume	$25,400
E = C x D	Total Contribution margin	$762,000
F	Fixed Cost	$839,400
G = E - F	Present yearly Net Operating Income (loss)	($77,400) = Answer

--Requirement 2

A	Fixed Cost	$839,400
B	Contribution margin per unit	$30
C = A/B	Present Break Even point in unit sales	27,980
D = C x $ 95	Present Break Even point in dollar sales	$2,658,100

--Requirement 3
For this, go through below schedule of Net Operating Income (loss) at various sales level.

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]
25,400	$95	$65	$30	$762,000	$839,400	($77,400)
30,400	$93	$65	$28	$851,200	$839,400	$11,800
35,400	$91	$65	$26	$920,400	$839,400	$81,000
40,400	$89	$65	$24	$969,600	$839,400	$130,200
45,400	$87	$65	$22	$998,800	$839,400	$159,400
50,400	$85	$65	$20	$1,008,000	$839,400	$168,600
55,400	$83	$65	$18	$997,200	$839,400	$157,800
60,400	$81	$65	$16	$966,400	$839,400	$127,000
65,400	$79	$65	$14	$915,600	$839,400	$76,200
70,400	$77	$65	$12	$844,800	$839,400	$5,400
75,400	$75	$65	$10	$754,000	$839,400	($85,400)
80,400	$73	$65	$8	$643,200	$839,400	($196,200)
85,400	$71	$65	$6	$512,400	$839,400	($327,000)
90,400	$69	$65	$4	$361,600	$839,400	($477,800)
95,400	$67	$65	$2	$190,800	$839,400	($648,600)
100,400	$65	$65	$0	$0	$839,400	($839,400)

--Answer:
Maximum annual profit = $ 168,600 can be earned
Units sold = 50,400 units
Selling price = $ 85 per unit

--Requirement 4

A	Fixed Cost	$839,400
B	Contribution margin per unit [$85 - $65]	$20
C = A/B	Present Break Even point in unit sales	41,970
D = C x $ 85	Present Break Even point in dollar sales	$3,567,450