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 $5.50 per unit. Enough capacity exists in the company’s plant to produce 20,000 units of the toy each month. Variable costs to manufacture and sell one unit would be $2.75, and fixed costs associated with the toy would total $70,000 per month.

The company’s Marketing Department predicts that demand for the new toy will exceed the 20,000 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed cost of $5,000 per month. Variable costs in the rented facility would total $3.00 per unit, due to somewhat less efficient operations than in the main plant.

Required:

1. Compute the monthly break-even point for the new toy in units and in total dollar sales. Show all computations in good form.

2. How many units must be sold each month to make a monthly profit of $3,000?

3. If the sales manager receives a bonus of 5 cents for each unit sold in excess of the break-even point, how many units must be sold each month to earn a return of 4.9% on the monthly investment in fixed costs?

Answer 1

Solution 1:
Normal Contribution Margin per unit
Selling Price	$5.50
Other Variable Cost	$2.75
Contribution per Unit	$2.75
Contribution Margin from Rented Space
Selling Price	$5.50
Other Variable Cost	$3.00
Contribution per Unit	$2.50
Computation of Break Even Point
Current Fixed Costs	$70,000
Less: Recovered by Current Contribution margin (20000*2.75)	$55,000
Unrecovered Fixed Cost	$15,000
Add: Additional Fixed Cost	$5,000
Total additional fixed costs to be Recovered	$20,000
/ Contribution margin Per Unit from rented space	$2.50
Additional Number of Units	8000
Total Breakeven Units (20000 + 8000)	28000
Breakeven Point in Dollares(Break even units*$5.50)	$1,54,000
Soltuion 2:
Computation of Total Units to be sold
Total additional fixed costs to be Recovered	$20,000
Add: Desired Profit	$3,000
Additional Contribution	$23,000
Contribution Margin per Unit	$2.50
Additional Number of Units	9200
Total units to be Sold (20000 + 9200)	29200
Solution 3:
Computation of New Contribution margin per unit
Variable Cost	$3.00
Add: Bonus	$0.05
Total Variable Cost	$3.05
Selling Price	$5.50
New Contribution Margin per Unit	$2.45
Compuattion of Total units to be sold
Total Fixed Investment (70000+5000)	$75,000
Desired Profit(Fixed Investment * 4.9%)	$3,675
New Contribution margin per Unit	$2.45
Number of Units (Desired profit*New contr. Margin per unit)	1500
Total units to be Sold(28000+1500)	29500