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)?

Answer 1

1. Calculation of Yearly Net Operating Income or Loss

Particulars	Amount
Selling Price per Unit	$70
Less: Variable Cost per Unit	$40
Contribution Per Unit	$30
Annual Sales Volume	15,000 Units
Total Contribution ( 15,000 units X $30)	$4,50,000
Fixed Expense for the year	$5,40,000
Net Operating Loss ($4,50,000 - $5,40,000)	($90,000)

2. Present Break-Even Point in Unit Sales = Fixed Cost / Contribution Per Unit

= $5,40,000 / $30

= 18,000 Units.

Present Break-Even Point in Dollar Sales = Break-Even Point in Unit Sales X Selling Price per Unit

= 18,000 Units X $70 per Unit

= $12,60,000

3.

Unit Selling Price	Unit Variable Cost	Unit Contribution Margin	Sales Volume (Units)	Total Contribution Margin	Fixed Expenses	Net Operating Income or (Loss)
$70	$40	$30	15,000	$4,50,000	$5,40,000	($90,000)
$68	$40	$28	20,000	$5,60,000	$5,40,000	$20,000
$66	$40	$26	25,000	$6,50,000	$5,40,000	$1,10,000
$64	$40	$24	30,000	$7,20,000	$5,40,000	$1,80,000
$62	$40	$22	35,000	$7,70,000	$5,40,000	$2,30,000
$60	$40	$20	40,000	$8,00,000	$5,40,000	$2,60,000
$58	$40	$18	45,000	$8,10,000	$5,40,000	$2,70,000
$56	$40	$16	50,000	$8,00,000	$5,40,000	$2,60,000
$54	$40	$14	55,000	$7,70,000	$5,40,000	$2,30,000

The Maximum Profit is $2,70,000. This level of profit can be earned by selling 45,000 units at a Price of $58 Per Unit.

4. At a selling price of $58 per unit, the contribution margin is $18 per unit.

Unit Sales to Break Even = Fixed Expenses / Unit Contribution Margin

= $5,40,000 / $18 per unit

= 30,000 Units.

Dollar Sales to Break Even = Unit Sales to Break Even X Selling Price Per Unit

= 30,000 Units X $58 per unit

= $17,40,000.