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 $96 per unit, and variable expenses are $66 per unit. Fixed expenses are $831,600 per year. The present annual sales volume (at the $96 selling price) is 25,100 units.

1. What is the present yearly net operating income or loss?

Net operating 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 Operating Loss :

Contribution :(96-66)*25100 : 753,000$

Less : Fixed Cost : 831,600$

Net Operating Loss : 78,600$

Answer 2 :

Break Even Sales Units : Fixed Cost/Contribution

= 831600/30=27,720 units

Break Even Point in Sales = 27,720*96

=26,61,120

Answer 3 :

Maximum Profit :

Contribution : (94-66)*30100 : 903,000

Less : Fixed Cost : 831,600

Maximum Profit : 71400$

Number of Units : 30,100 units

Answer 4 :

Break even units :831,600/28=29700 units

Break even sales : 29700*94=27,91,800$