Question

Delphi Company has developed a new product that will be marketed for the first time during the

next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at P36

per unit, Delphi management has allocated only enough manufacturing capacity to produce a

maximum of 25,000 units of the new product annually. The fixed expenses associated with the new

product are budgeted at P450,000 for the year. The variable expenses of the new product are P16 per

unit.

Required:

a. How many units of the new product must Delphi sell during the next fiscal year in order to break

even on the product?

b. What is the profit Delphi would earn on the new product if all of the manufacturing capacity

allocated by management is used and the product is sold for P36 per unit?

c. What is the degree of operating leverage for the new product if 25,000 units are sold for P36 per

unit?

d. The Marketing Department would like more manufacturing capacity to be devoted to the new

product. What would be the percentage increase in net operating income for the new product if its unit

sales could be expanded by 10% without any increase in fixed expenses and without any change in

the unit selling price and unit variable expense?

e. Delphi's management has stipulated that the new product must earn a profit of at least P125,000 in

the next fiscal year. What unit selling price would achieve this target profit if all of the manufacturing

capacity allocated by management is used and all of the output can be sold at that selling price?