Question

Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The company’s Marketing Department estimates that demand for the new toy will range between 10,000 units and 35,000 units per month. The new toy will sell for $9.00 per unit. Enough capacity exists in the company’s plant to produce 15,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $5.00, and incremental fixed expenses associated with the toy would total $32,000 per month.

 

Neptune has also identified an outside supplier who could produce the toy for a price of $4.00 per unit plus a fixed fee of $29,000 per month for any production volume up to 15,000 units. For a production volume between 15,001 and 35,000 units the fixed fee would increase to a total of $58,000 per month.

1. Calculate the break-even point in unit sales assuming that Neptune does not hire the outside supplier.

2. How much profit with Neptune earn assuming:

a. It produces and sells 15,000 units.

b. It does not produce any units and instead outsources the production of 15,000 units to the outside supplier and then sells those units to its customers.

3. Calculate the break-even point in unit sales assuming that Neptune plans to use all of its production capacity to produce the first 15,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 20,000 additional units.

4. Assume that Neptune plans to use all of its production capacity to produce the first 15,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 20,000 additional units.

a. What total unit sales would Neptune need to achieve in order to equal the profit earned in requirement 2a?

b. What total unit sales would Neptune need to achieve in order to attain a target profit of $30,500 per month?

c. How much profit will Neptune earn if it sells 35,000 units per month?

d. How much profit will Neptune earn if it sells 35,000 units per month and agrees to pay its marketing manager a bonus of 20 cents for each unit sold above the break-even point from requirement 3?  

Answer 1

1:	Break-even point in unit sales- Without hiring	8,000	Units
	Working Note 1:
	Break even = Fixed cost / Contribution per unit
	Incremental fixed fee	32,000
	Selling price	9
	Less: Variable cost	5
	Contribution per unit	4
	Break-even point in unit sales- Without hiring	8,000	UNITS
2-a	Profit if produces and sell	28,000
2-b	Profit if outsources production and sells	46,000
		Make and sell(2a)	Buy and sell(2b)
	Sales Revenue	135,000	135,000
	Less: Variable cost	75,000	60,000
	Contribution margin	60,000	75,000
	Less: Fixed cost	32,000	29,000
	Net Income	28,000	46,000
3	Break-even point in unit sales- With hiring	15,200	Units
	For the first 15000 Units
	Contribution per unit	4.0
	Above 15000 Units
	Contribution per unit	5
	Fixed cost For the first 15000 Units	32,000
	Fixed cost for Above 15000 Units	29,000
	Total Fixed cost	61,000
	Less: contribution margin For the first 15000 Units	60,000
	Remaining uncovered cost	1,000
	Divided by CM per unit if hired	200	Units
	Break-even point in unit sales- With hiring	15,200	Units
4-a	Total Units Sales	20,800	Units
	Target Units = (Total Fixed cost + Target Profit)/Contribution per unit
	Total Fixed cost	61,000
	Target Profit	28,000
	Total amount to be covered	89,000
	Less: contribution margin For the first 15000 Units	60,000
	Remaining uncovered cost	29,000
	Divided by CM per unit if hired	5,800
	Total Units Sales	20,800
4-b	Total Units Sales To achieve target profit of $30500	21,300
	Target Units = (Total Fixed cost + Target Profit)/Contribution per unit
	Total Fixed cost	61,000
	Target Profit	30,500
	Total amount to be covered	91,500
	Less: contribution margin For the first 15000 Units	60,000
	Remaining uncovered cost	31,500
	Divided by CM per unit if hired	6,300
	Total Units Sales	21,300
4-c	Net Operating INCOME	99,000
		Make and sell	Buy and sell	Total
	Units	15,000	20,000	35,000
	Sales Revenue	135,000	180,000	315,000
	Less: Variable cost	75,000	80,000	155,000
	Contribution margin	60,000	100,000	160,000
	Less: Fixed cost	32,000	29,000	61,000
	Net Income	28,000	71,000	99,000
4-d	Net operating Income-Bonus to marketing manager	97,020
	Net Operating income without bonus	99,000
	Units eligible for a bonus	19,800	(Total units - break even units as per Req 3)
	Bonus amount	1,980	(Units eligible * bonus per unit)
	Net Income after bonus	97,020
5	Net Operating fully outsourced	117,000
		Buy and sell
	Units	35,000
	Sales Revenue	315,000
	Less: Variable cost	140,000
	Contribution margin	175,000
	Less: Fixed cost	58,000
	Net Income	117,000