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 $92 per unit, and variable expenses are $62 per unit. Fixed expenses are $832,500 per year. The present annual sales volume (at the $92 selling price) is 25,200 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) Present net operating income or loss = (92-62)*25200-832500 = -76500

2) Break even = 832500/30 = 27750 Units

Break even sales = 27750*92 = $2553000

3) On 27750 units sale company has break even i.e. no profit or no loss point so if sale price (90-2-2) = 88 then profit = (88-62)*35200-832500 = 82700

On 86 selling price = (86-62)*40200-832500 = 132300

On 84 Selling price = (84-62)*45200-832500 = 161900

On 82 Selling price = (82-62)*50200-832500 = 171500

On 80 Selling price = (80-62)*55200-832500 = 161100

So 50200 Units will be sold on 82 per unit company can generate maximum profit $171500

4) Break even point = 832500/(82-62) = 41625 Units

Break even sales = 41625*82 = $3413250