Question

Company XYZ 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 $93 per unit, and variable expenses are $63 per unit. Fixed expenses are $838,500 per year. The present annual sales volume (at the $93 selling price) is 25,700 units.

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?
Break even point in units: ___________
Break even point 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?
Maximum Profit: __________
Number of Units: __________
Selling Price: __________

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)?
Break even point in units: ___________
Break even point in dollar sales: ___________

Answer 1

Answer:1)-Present annual profit/(loss)= Sales – Variable cost- Fixed cost

={($93 per unit -$63 per unit)*25700 units}-$838500

=($67500)

2)-Maximum annual profit ={($93 per unit- $2 per unit)-$63 per unit}*(25700 units+5000 units)-$838500

=($91 per unit-$63 per unit)*30700 units-$838500

=$859600-$838500

=$21100

Maximum profit =$21100

Number of units =30700 units

Selling price =$91 per unit

3)-Break even points in units =Fixed costs/Contribution per unit

=$838500/($91 per unit-$63 per unit)

=$838500/$28 per unit

=33540 units

Break even points in dollars =33540 units*$91 per unit =$3052140