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 $2.80 per unit. Enough capacity exists in the company’s plant to produce 30,800 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.78, and fixed expenses associated with the toy would total $46,624 per month. The company's Marketing Department predicts that demand for the new toy will exceed the 30,800 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,331 per month. Variable expenses in the rented facility would total $1.96 per unit, due to somewhat less efficient operations than in the main plant. Required: 1. What is the monthly break-even point for the new toy in unit sales and dollar sales. 2. How many units must be sold each month to attain a target profit of $10,752 per month? 3. If the sales manager receives a bonus of 25 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 21% return on the monthly investment in fixed expenses? (For all requirments, Round "per unit" to 2 decimal places, intermediate and final answers to the nearest whole number.)

Answer 1

1) Breakeven point in unit sales: 51,680 units

Breakeven point in dollar sales: $144,704

Working:

On the first 30,800 units
Sales price	2.8
Variable expenses	1.78
Contribution margin	1.02
Above 30,800 units
Sales price	2.8
Variable expenses	1.96
Contribution margin	0.84

Fixed cost for initial 30,800 unts	46,624
Less: CM (30,800 units * $1.02)	31,416
Remaining uncovered cost	15,208
Monthly rental for additional space	2,331
Total fixed costs covered by remaining sales	17,539

17,539 / 0.84 = 21,880 units

Breakeven units = 30,800 + 21,880= 51,680

51,680 * $2.8 = $144,704

2) Solution: 64,480 units

Working: 10,752 / 0.84 = 12,800 units

Thus total units = 51,680 + 12,800 = 64,480

3) Solution: 92,804 units

Working: Desired monthly expenses: $46,624 + $2331 = 48,955

48,955 * 21% = 10,281

Unit contribution margin : 0.84 - 0.25 = 0.59

Contribution margin = Target profit / Unit contribution margin = 10,281 / 0.25 = 41,124 units

51,680 units + 41,124 units = 92,804 units