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 $93 per unit, and variable expenses are $63 per unit. Fixed expenses are $840,000 per year. The present annual sales volume (at the $93 selling price) is 25,400 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

25400 93 63 840000 93.00 63.00 30.00 32% Units Sales Selling Price Per unit Variabel Expense Per unit Fixed Expenses Compute the CM ratio Selling Price Per unit Variabel Expense Per unit Contribution Margin per unit (Selling Price - Varible Cost) CM Ratio =( CM/Selling Price) Answers 1. Present Yearly Net operating income (loss) (Units * CM Per unit)-Fixed cost (25100*30)-837000 = Net operating loss 2 Compute the Break Even point Break Even in Unit Sales =( Fixed Cost / CM Per unit) Brake Even in Dollar sales =( Fixed Cost/ CM ratio) 3. If the Market Studied are Correct Maximum Profit Number of Units Selling Price 4. Break Even Point at this Price Break Even in Unit Sales =( Fixed Cost / CM Per unit) = (84000/(83-63)) Break Even in Dollar sales =42000*83 -78000 28000 Units 2604000 Dollars 168000 dollars 50400 Units 83 Per unit 42000 Units 3486000 Dollars

sales Selling Price Marketing Studies Increase by 5000 Units with Every $2 Reduction Selling Price Net Revenue = Variable cost=Contribution Operating Sales Units Units *Price Units *VC Margin Fixed Cost income 93 25400 2362200 1600200 762000 840000 -78000 30400 2 766400) 1915200 851200 840000 112001 354001 3150600 2230200 920400 840000 80400 40400 3514800 2545200 969600 840000 129600 45400 3859000 2860200 998800 840000 1588001 50400 4183200 3175200 1008000 840000 168000 55400 4487400 3490200 9972001 840000 157200 604001 4771600 3805200 9664001 840000 126400 65400 5035800 41202001 9156001 840000 75600 70400 5280000 4435200 8448001 8400001 48000 85