Question

Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $3.40 per unit. Enough capacity exists in the company’s plant to produce 30,900 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.14, and fixed expenses associated with the toy would total $57,901 per month. The company's Marketing Department predicts that demand for the new toy will exceed the 30,900 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,895 per month. Variable expenses in the rented facility would total $2.38 per unit, due to somewhat less efficient operations than in the main plant.

Required:

1. What is the monthly break-even point for the new toy in unit sales and dollar sales.

2. How many units must be sold each month to attain a target profit of $12,342 per month?

3. If the sales manager receives a bonus of 20 cents for each unit sold in excess of the break-even point, how many units must be sold each month to attain a target profit that equals a 23% return on the monthly investment in fixed expenses?

Answer 1

1)

Contribution margin till 30,900 units:

= $3.40 - $2.14

= $1.26

Total fixed cost = $57,901 + $2,895

= $60,796

Total contribution margin till 30,900 units:

= $1.26 X 30,900

= $38,934

Remaining fixed cost = $60,796 - $38,934

= $21,862

Contribution margin after 30,900 units:

= $3.40 - $2.38

= $1.02

Units sold for remaining fixed cost:

= $21,862 / $1.02

= 21,433

Units sold for Breakeven:

= 30,900 + 21,433

= 52,333 units

2)

Units sold to attain target profit:

= 52,333 + ($12,342 / $1.02)

= 64,433

3)

Contribution margin after Breakeven:

= $1.02 - $0.20

= $0.82

Target profit = ($57,901 + $2,895) X 23%

= $13,983

Units sold to attain target profit:

= 52,333 + ($13,983 / $0.82)

= 69,386 units