Question

Last year Minden Company introduced a new product and sold 25,700 units of it at a price of $94 per unit. The product's variable expenses are $64 per unit and its fixed expenses are $838,800 per year.

Required:

1. What was this product's net operating income (loss) last year?

2. What is the product's break-even point in unit sales and dollar sales?

3. Assume the company has conducted a marketing study that estimates it can increase annual sales of this product by 5,000 units for each $2 reduction in its selling price. If the company will only consider price reductions in increments of $2 (e.g., $68, $66, etc.), what is the maximum annual profit that it can earn on this product? What sales volume and selling price per unit generate the maximum profit?

4. What would be the break-even point in unit sales and in dollar sales using the selling price that you determined in requirement 3? (Do not round intermediate calculations.)

Answer 1

1) Calculate net operating income

Sales (25700*94)	2415800
Variable cost	1644800
Contribution margin	771000
Fixed cost	838800
Net operating income (loss)	-67800

2) Break even unit = 838800/30 = 27960 Units

Break even sales = 27960*94 = $2628240

3) Calculate following

Selling price	Unit	Profit
92	30700	30700*28-838800 = 20800
90	35700	35700*26-838800 = 89400
88	40700	40700*24-838800 = 138000
86	45700	45700*22-838800 = 166600
84	50700	50700*20-838800 = 175200
82	55700	55700*18-838800 = 163800

Selling price = $84; Unit sale = 50700 Units; Maximum profit = 175200

4) Break even unit = 838800/20 = 41940 Units

Break even sales = 41940*84 = $3522960