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 $91 per unit, and variable expenses are $61 per unit. Fixed expenses are $833,400 per year. The present annual sales volume (at the $91 selling price) is 25,700 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

(1) Operating income/los Sales Revenue $ 2,338,700 $ 1,564,700 len: Variable cost (25,400x461) Contribution maigin - $441,000 les fixed cost $ 833,400 Ner los $ 62,400 - Ner Operating loss - $62,400 (2) Bueak Ewer point In units - fexed cost Coutribution Mougin P-O $883,400 ($91-861) $883,400 $80 - 24H,780 unite Pn dollars - 27,7808&al - $ 2, Sa7,980 (3) Maximum puotis At $91 - 25,700 - At $89 - 30,700 At $8+ - 85,700 - At $85 - 40,700 At $83 - 45,700 - AL $81 - 50,700 - At $+9 - 55,400 - coutribution $ 77,000 $ 859,600 $928,200 $976,800 $ 1,00s, 400 - $ 1,014,000 - $1,002,600 1 Highest

.: Maximum puofit = contribution - lens Pixed cost - $ 1,014,000 $833,400 Income $ 180,600 . Maximum puotit - $ 180,600 At a uate of $81 dos 50,700 units (4) Break even point Pn unit $883,400 $81-861 $833,400 41.670 units ఆ 20 In Dollars = 41,670 x 480 81 - $ 3,375,270