Question

The vice-president of marketing, Carol Chow, thinks that her firm can increase sales by 15,500 units for each $5-per-unit reduction in its selling price. The company’s current selling price is $90 per unit and variable expenses are $63 per unit. Fixed expenses are $688,500 per year. The current sales volume is 37,000 units.

Operating income $310500

Break-even point		25500	units
Break-even point		$ 2295000

Answer the following questions:

Assuming that Carol is correct, what is the maximum profit that the firm could generate yearly? At how many units and at what selling price per unit would this profit be generated? Assume that capacity is not a problem and total fixed expenses will be the same regardless of volume.

Maximum profit		$	467500
Units		68000	units
Selling price		$80	per unit

What would be the break-even point in units and in dollar sales using the selling price you have determined?

Break-even point			units
Break-even point		$

Answer 1

Solution:-

For the calculation of maximum profit,selling price and units are given there itself i.e 80$ and 68000 units respectively.

Calculation of maximum profit:-

Sales =68000*80=5440000

(less)variable cost=63*68000=(4284000)

Contribution. =1156000

(Less)fixed cost =(688500)

Profit. =467500

Calculation for Break even point if selling price is 80$,:-

Break-even point(in units)=Fixed cost/contribution per unit

Contribution per unit= Selling price/unit -variable costs/unit

Contribution per unit= 80-63=17$

Break-even point = 688500/17= 40500 units

Calculation for break-even point in $:-

Break-even point (in $)= Fixed costs/contribution margin ratio

Contribution margin ratio= Contribution÷Sales*100

=(80-63)÷80*100

=21.25%

Breakeven point(in $)= 688500/21.25%

=3240000$