Question

Problem 2-19 (Algo) Break-Even Analysis; Pricing [LO2-1, LO2-4, LO2-5) 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 $100 per unit and variable expenses are $70 per unit. Pixed expenses are $831,000 per year. The present annual sales volume (at the $100 selling price is 25,400 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 eam? 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 unlt sales and in dollar sales using the selling price you determined in (3) above (eg. the selling price at the level of maximum profits)? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required Required 2 Required 3 Required What would be the break-even point in unit sales and in dollar sales using the selling price you determined in Required (3) (e.g. the selling price at the level of maximum profits)? (Do not round intermediate calculations.) Break-even point in units Break-even point in dollar sales 41.715 $ 3.712.835 < Required 3 Pue 1 0 5 : Next >

Answer 1

Answer

1 income statement (present year)

Particulars	$
Sales (25,400 × 100)	2,540,000
Less variable cost (25,400 × 70)	1,778,000
Contribution margin	762,000
Less fixed cost	831,000
Net loss	(69,000)

Net loss is $69,000 in the present year.

2 selling price = $100

Variable cost = $70

Contribution margin per unit = 100 - 70 = $30

Contribution margin ratio = 30 / 100 = .30

Fixed cost = $831,000

Break even point in unit = fixed cost / contribution margin per unit

Break even point in unit = 831,000 / 30 = 27,700 units

Break even point in dollar sales = fixed cost / contribution margin ratio

Break even point in dollar sales

= 831,000 / .30 = $2,770,000

3 if the marketing studies are correct

New selling price = 100 - 2 = $98

New selling units = 25,400 + 5,000 = 30,400 units

Income statement (based on market study changes)

Particulars	$
Sales (30,400 × 98)	2,979,200
Less variable cost (30,400 × 70)	2,128,000
Contribution margin	851,200
Fixed cost	831,000
Net profit	20,200

If the new market studies are correct the net profit is $20,200.

4 contribution margin per unit = 98 - 70 = $28

Contribution margin ratio = 28 / 98 = .28

Break even point in unit = 831,000 / 28 = 29,678 units

Break even point in dollar = 831,000 / .28 = $2,908,444

The break even point in unit is 29,678 and break even point in dollar is $2,908,444.

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