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 $98 per unit, and variable expenses are $68 per unit. Fixed expenses are $839,400 per year. The present annual sales volume (at the $98 selling price) is 25,600 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

1) Net operating income

Sales (25600*98)	2508800
Variable cost (25600*68)	1740800
Contribution margin	768000
Fixed cost	839400
Net income (loss)	-71400

2) Break even unit = 839400/30 = 27980 Units

Break even sales = 27980*98 = 2742040

3) Calculate maximum Unit

	Contribution margin	Profit
25600+5000 = 30600	96-68 = 28*30600 = 856800	17400
30600+5000 = 35600	26*35600 = 925600	86200
40600	24*40600 = 974400	135000
45600	22*45600 = 1003200	163800
50600	50600*20 = 1012000	172600
55600	55600*18 = 1000800	161400

So maximum price = 98-10 = 88

and unit = 50600 Units

4) Break even unit = 839400/20 = 41970 Units

Break even sales = 41970*88 = $3693360