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 $70 per unit, and variable expenses are $40 per unit. Fixed expenses are $540,000 per year. The present annual sales volume (at the $70 selling price) is 15,000 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)? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 What is the present yearly net operating income or loss? Net operating loss Required 1 Required 2 >

Answer 1

1) Present net operating income = (70-40)*15000-540000 = -90000

2) Break even Unit = 540000/30 = 18000 units

Break even sales = 18000*70 = $1260000

3) Calculate following

Selling price	Units	Profit
68	20000	20000*28-540000 = 20000
66	25000	25000*26-540000 = 110000
64	30000	30000*24-540000 = 180000
62	35000	35000*22-540000 = 230000
60	40000	40000*20-540000 = 260000
58	45000	45000*18-540000 = 270000
56	50000	50000*16-540000 = 260000

Selling price = 58

Unit sales = 45000

Profit = $270000

4) Break even unit = 540000/18 = 30000 Units

Break even sales = 30000*58 = $1740000