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 40,000 units per month. The new toy will sell for $10.00 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 $6.00, 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 $5.00 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 unt 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 20,00d 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 20,000 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 40,000 units per month? d. How much profit will Neptune earn if it sells 40,000 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 40,000 units?

Answer 1

Answer-

1.	Break-even point in unit sales: without hiring	8,000	units
2.a.	Profit if produces and sellss 20,000 units	$ 48,000
2.b.	Profit if outsources production of 20,000 units	$ 51,000
3.	Break-even point	17,800	units
4.a.	Total unit sales	20,000	units
4.b.	Total unit sales	30,300	units
4.c.	Net operating income	$ 99,000
4.d.	Net operating income: bonus to marketing manager	$ 94,560
5.	Net operating income: fully outsourced	$ 102,000

1. Break-even point in unit sales without outsourcing = Fixed Cost / Contribution Margin per Unit = $ 32,000 / $ ( 10 - 6 ) = 8,000 units per month.

2. a. Profit if it produces and sells 20,000 units = Total Contribution Margin - Total Fixed Costs = 20,000 units x $ 4 - $ 32,000 = $ 48,000

2.b. Profit if production of 20,000 units is outsourced and sold = Total Contributio Margin - Total Fixed Costs = 20,000 x $ ( 10.00 - 5.00 ) - $ 49,000 = $ 51,000

3. Overall break-even point = $ 32,000 / $ 4.00 + $ 49,000 / $ 5.00 = 17,800 units

4.a. Unit sales required to earn profit of $ 48,000 = ( Fixed Cost + Target Profit) / Contribution Margin per Unit = $ ( 32,000 + 48,000 ) / $ 4.00 = 20,000 units

4.b. Unit sales required to earn $ 50,500 = 20,000 units + $ ( 50,500 - 48,000 + 49,000 ) / $ 5 = 30,300 units

4.c. Net operating income from sale of 40,000 units per month = 20,000 x $ 4 + 20,000 x $ 5 - $ 32,000 - $ 49,000 = $ 99,000

4.d. Units above break-even point = 40,000 - 17,800  = 22,200

Bonus to marketing manager = 22,200 x $ 0.20 = $ 4,440

Profit from sale of 40,000 units = $ 99,000 - $ 4,440 = $ 94,560

5. Profit on outsourcing of 40,000 units = 40,000 x $ ( 10.00 - 5.00 ) - $ 98,000 = $ 102,000