Question

Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The company's Marketing Department estimates that demand for the new toy will range between 20,000 units and 30,000 units per month. The new toy will sell for $8.00 per unit. Enough capacity exists in the company's plant to produce 25,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $4.00, and incremental fixed expenses associated with the toy would total $32,000 per month. Neptune has also identified an outside supplier who could produce the toy for a price of $3.00 per unit plus a fixed fee of $69,000 per month for any production volume up to 25,000 units. For a production volume between 25,001 and 55,000 units the fixed fee would increase to a total of $138,000 per month. Required: 1. Calculate the break-even point in unit sales assuming that Neptune does not hire the outside supplier. 2. How much profit with Neptune earn assuming: a. It produces and sells 25,000 units. b. It does not produce any units and instead outsources the production of 25,000 units to the outside supplier and then sells those units to its customers. 3. Calculate the break-even point in unit sales assuming that Neptune plans to use all of its production capacity to produce the first 25,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 5,000 additional units. 4. Assume that Neptune plans to use all of its production capacity to produce the first 25,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 5,000 additional units. a. What total unit sales would Neptune need to achieve in order to equal the profit earned in requirement 2a? b. What total unit sales would Neptune need to achieve in order to attain a target profit of $70,500 per month? c. How much profit will Neptune earn if it sells 30,000 units per month? d. How much profit will Neptune earn if it sells 30,000 units per month and agrees to pay its marketing manager a bonus of 10 cents for each unit sold above the break-even point from requirement 3? 5. If Neptune outsources all production to the outside supplier, how much profit will the company earn if it sells 30,000 units?

Answer 1

Answer - 1 - Break even sales in units

Particulars	Amount
Sale price	$             8.00
Less:-Variable cost	$             4.00
Contribution	$            4.00
Incremental Fixed cost per month	$     32,000.00
Break even sales in units	=32000/4
=Fixed cost/Contribution per unit	8,000 units

Answer - 2a - Full manufacture of goods in own factory.

Particulars	Amount	25,000 units sold per month
Sale price	$             8.00	$ 2,00,000
Less:-Variable cost	$             4.00	$ 1,00,000
Contribution	$             4.00	$ 1,00,000
Less:- Incremental Fixed cost per month		$     32,000
Profit on full manufacture		$     68,000

Answer - 2b - Full purchase of goods from seller.

Particulars	Amount	25,000 units sold per month
Sale price	$             8.00	$ 2,00,000
Less:-Purchase cost	$             3.00	$     75,000
Contribution	$             5.00	$ 1,25,000
Less:- Incremental Fixed cost per month		$     69,000
Profit on purchase of goods from seller		$     56,000

Answer -3

Break even sales in units on both manufacture and purchase of goods

Particulars	Amount	Units
On Manufacture Incremental Fixed cost per month on manufacture in own plant	$     32,000.00
Contribution per unit(8-4=4)	$             4.00
Break even sales in units =     Fixed cost/Contribution per unit		8000
On Purchase Incremental Fixed fee per month - if hired to purchase from outside	$     69,000.00
Contribution per unit(8-3=5)	$             5.00
Break even sales in units =      Fixed cost/Contribution per unit	=49000/5	13,800
Total Break even sales in units	=8000+13800	21,800 units