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 $94 per unit, and variable expenses are $64 per unit. Fixed expenses are $837,000 per year. The present annual sales volume (at the $94 selling price) is 25,800 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 (eg, 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?

Answer 1

Answer 1; Net operating loss : $(63,000)

Explanation:

Selling price per unit	94
Variable cost oper unit	64
Contribution margin per unit	30
* Number of units	25,800 units
Total contribution margin	774,400
- Fixed costs	(837,000)
Net operating loss	$(63,000)

Answer 2.

Break-even point in units	27,900 units
Break-even point in dollar sales	$2,622,600

Explanation:

Break-even point in units = Fixed costs / Contribution margin per unit

= $837,000 / $30 = 27,900 units.

Break-even point in dollar sales = Break-even point in units * Selling price per unit

= 27,900 units * $94 = $2,622,600.

Answer 3.

Maximum annual profit	$179,000
Number of units	50,800 units
Selling price per unit	$84

Explanation:

Unit selling price	Unit variable cost	Unit contribution margin	Units	Total contribution margin	Fixed costs	Net income
94	64	30	25,800	774,400	837,000	(63,000)
92	64	28	30,800	862,400	837,000	25,400
90	64	26	35,800	930,800	837,000	93,800
88	64	24	40,800	979,200	837,000	142,200
86	64	22	45,800	1,007,600	837,000	170,600
84	64	20	50,800	1,016,000	837,000	179,000
82	64	18	55,800	1,004,400	837,000	167,400
80	64	16	60,800	972,800	837,000	135,800

From the caclulation in above table the maximum annual profit can be earned is $179,000, by selling 50,800 units at $84 per unit.

Answer 4.

Break-even point in units	41,850 units.
Break-even point in dollar sales	$3,515,400

Explanation:

Break-even point in units = Fixed costs / Contribution margin per unit

= $837,000 / $20 = 41,850 units.

Break-even point in dollar sales = Break-even point in units * Selling price per unit

= 41,850 units * $84 = $3,515,400.