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 35,000 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 $36,000 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 $45,000 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 $90,000 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 15,000 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 15,000 additional units.

a. What total unit sales would Neptune need to achieve in order to equal the profit earned in requirement 2 a?

b. What total unit sales would Neptune need to achieve in order to attain a target profit of $46,500 per month?

c. How much profit will Neptune earn if it sells 35,000 units per month?

d. How much profit will Neptune earn if it sells 35,000 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?

5. If Neptune outsources all production to the outside supplier, how much profit will the company earn if it sells 35,000 units?

Answer 1

in the given problem

own production capacity 20000 units

sales price = $ 8 per unit

fixed price = $ 36000 to produce maximum 20000 units

variable cost = $ 4 per unit

if production outsourced

variable cost = $ 3

fixed cost = $ 45000 upto 20000 units, $ 90000 for 20001 to 45000 units

3. calculation of break-even point in unit sales assuming neptune plans to use all of its production capcity to produce the first 20000 units, and commits to hiring the outside supplier to produce up to 15000 additional units

break-even point = Fixed Cost/(sales price-variable cost)

break-even point for own production = 36000/(8-4)

=9000 units

break-even point for outside supplier production = 45000/(8-3)

= 9000 units

hence total breakeven point in units = 9000+9000

= 18000 units

4d. calculation of profit earned by neptune if it sells 35000 units per month and agrees to pay its marketing manager a bonus of 20 cents for each unit sold above the beak-even point from requirements.

bonus = (sales in units - breakeven point in units) X 20 cents

= (35000-18000)x20 cents

= 17000 units x 20 cents

bonus = 340000 cents ($3400)