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 $3.50 per unit. Enough capacity exists in the company’s plant to produce 30,300 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.20, and fixed expenses associated with the toy would total $58,585 per month.

The company's Marketing Department predicts that demand for the new toy will exceed the 30,300 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,929 per month. Variable expenses in the rented facility would total $2.45 per unit, due to somewhat less efficient operations than in the main plant.

3. If the sales manager receives a bonus of 15 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 25% return on the monthly investment in fixed expenses?

Answer 1

Break-even point for the new toy in unit sales

= Fixed Cost/ Contribution margin

= $ 61,514/(3.5-2.45)

= $ 61,514/1.05

= 58,585 units

Break-even point for the new toy in dollar sales

= Break-even units x Selling price per unit

= 58,585 x 3.5

=$ 205,047.5

3. Increase in profit 25% of Fixed Cost

= $ 61,514 x 25%

=$ 15,379

Desired Sales = (Desired profit + Fixed cost)/ contribution margin

= (15,379 + 61,514)/1.05

=76,893/1.05

=73,231 units

Excess sales over break even

=(73,231 - 61,514) x 3.5

= 11,717 x 3.5

= $ 41,010

Bonus to manger 15% of excess sales of break even

= $ 41,010 x 15%

= $ 6152