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 15,000 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 20,000 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 $49,000 per month for any production volume up to 20,000 units. For a production volume between 20,001 and 45,000 units the fixed fee would increase to a total of $98,000 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 20,000 units. b. It does not produce any units and instead outsources the production of 20,000 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 20,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 10,000 additional units. 4. Assume that Neptune plans to use all of its production capacity to produce the first 20,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 10,000 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 $50,500 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 20 cents for each unit sold above the break-even point from requirement 3?

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 - 2 a

Particulars	Amount	20,000 units sold per month
Sale price	$         8.00	$      1,60,000
Less:-Variable cost	$         4.00	$        80,000
Contribution	$         4.00	$        80,000
Less:- Incremental Fixed cost per month		$        32,000
Profit - if produces and sells-		$        48,000

Answer -2 b

If items are purchased from another supplier

Particulars	Amount	20,000 units sold per month
Sale price	$         8.00	$      1,60,000
Less:-Purchase cost	$         3.00	$        60,000
Contribution	$         5.00	$      1,00,000
Less:- Incremental Fixed fee per month for purchase upto 20,000 units		$        49,000
Profit		$        51,000

Answer -3

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	$   49,000.00
Contribution per unit(8-3=5)	$           5.00
Break even sales in units = Fixed cost/Contribution per unit	=49000/5	9800
Total Break even sales in units	=8000+9800	17800 units

Answer -4a

The units to be sold for earning profit as option 2a is same as 20,000 units, as both have same contrbution and fixed cost hence profit earned will be same of $ 48,000.

Answer -4b

Particulars	Amount
a.Incremental Fixed cost per month on manufacture in own plant	$   32,000.00
b.Incremental Fixed fee per month - if hired to purchase from outside	$   49,000.00
c.Desired profit	$   50,500.00
Total a+b+c	$ 1,31,500.00
Contribution per unit (average)	+((5+4)/2)=4.5
Break even sales in units =      Fixed cost+desired profit/Contribution per unit	29,222 units

Note -contribution per unit for 20,000 units of manufacture is $ 4 and 10,000 on purchased units is $ 5, hence average is taken