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 $70 per unit, and variable expenses are $40 per unit. Fixed expenses are $540,000 per year. The present annual sales volume (at the $70 selling price) is 15,000 units. Required: 1 What is the present yearly net operating income or loss? Answer Net Operation Loss $90,000 2. What is the present break-even point in unit sales and in dollar sales? Answer: Break- even point units 18,000 Break -even point sales $1260000 NEED Assistance on maximum profit 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?

Can someone please explain where did the 270,000 net income and 45000 units at price 58 came from. I read the explanation but didnt find it helpful at all.

Thank you.

Answer 1

1.Sales = 15,000*70 = $1,050,000

Less: Variable Cost = $600,000

Contribution Margin = $450,000

Fixed Expenses = $540,000

Net Operating Loss = $(90,000)

2.Break even point in units = total fixed costs/contribution margin per unit

= 540,000/30

= 18,000 units

In Dollar Sales = 18,000*70 = $1,260,000

3.Studies say that for every $2 reduction in price, quantity increases by 5,000 units

Selling price per Unit	Units Sold	Variable Cost per Unit	Contribution Margin per Unit	Total Contribution Margin
70	15,000	40	30	450,000
68	20,000	40	28	560,000
66	25,000	40	26	650,000
64	30,000	40	24	720,000
62	35,000	40	22	770,000
60	40,000	40	20	800,000
58	45,000	40	18	810,000
56	50,000	40	16	800,000

Contribution Margin is highest at Selling Price = $58, it starts falling after that.

Hence, best strategy is to sell 45,000 units at $58

Net Income = Contribution Margin – fixed expenses

= $810,000-$540,000

= $270,000