Question

Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $3.00 per unit. Enough capacity exists in the company’s plant to produce 30,800 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.90, and fixed expenses associated with the toy would total $50,320 per month.

The company's Marketing Department predicts that demand for the new toy will exceed the 30,800 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,516 per month. Variable expenses in the rented facility would total $2.10 per unit, due to somewhat less efficient operations than in the main plant.

Required:

1. What is the monthly break-even point for the new toy in unit sales and dollar sales.

2. How many units must be sold each month to attain a target profit of $10,800 per month?

3. If the sales manager receives a bonus of 20 cents for each unit sold in excess of the break-even point, how many units must be sold each month to attain a target profit that equals a 28% return on the monthly investment in fixed expenses?

Answer 1

1 Break even point in sales units Break even point in sales value 51,862 $155,587 Units * Selling price Working notes: Fixed cost Additional rent expense Total Fixed cost Contribution margin Balance fixed cost for recovery Contribution margin per unit Units need to recover fixed cost $50,320 $2,516 $52,836 $33,880 30,800* $1.10 $18,956 $0.90 21,062 $18,956/$0.90 Selling price Variable cost Contribution margin per unit Units Total contribution margin In-house $3.00 $1.90 $1.10 30,800 $33,880 Rental $3.00 $2.10 $0.90 2 Units to sell to achieve target profit 63,862 Fixed cost Additional rent expense Profit required per month Total Target per month Contribution margin Balance target needed Contribution margin per unit Units need to recover fixed cost $50,320 $2,516 $10,800 $63,636 $33,880 30,800* $1.10 $29,756 $0.90 33,062 $29,756/$0.90 3 Units to be sold 72,997 Fixed cost Additional rent expense Total fixed cost Profit required month Total target needed Contribution margin at Break even Balance needed Revised contribution per unit Units needed $50,320 $2,516 $52,836 $14,794 28% of Fixed cost $67,630) $52,836 at units sold of 51,862 $14,794 a $0.701b 21,134 a/b In-house $3.00 $1.90 Rental $3.00 $2.10 $0.20 Selling price Variable cost Bonus Contribution margin per unit Units Total contribution margin $0.70 $1.10 30,800 $33,880