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 $2.70 per unit. Enough capacity exists in the company's plant to produce 30,200 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.72, and fixed expenses associated with the toy would total $43,894 per month. The company's Marketing Department predicts that demand for the new toy will exceed the 30,200 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,195 per month. Variable expenses in the rented facility would total $1.89 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 $10,368 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 24% return on the monthly investment in fixed expenses? (For all requirements, Round "per unit" to 2 decimal places, intermediate and final answers to the nearest whole number.) 1. units Break-even point in unit sales Break-even point in dollar sales Unit sales needed to attain target profit Unit sales needed to attain target profit units 3. units

Answer 1

1. Contribution per unit for the first 30200 units= 2.7 - 1.72 = 0.98

Contribution margin in excess of 30200 units = 2.7 - 1.89 = 0.81

Total fixed costs= 43894 + 2195 = 46089

Recovery of fixed costs from first 30200 units = 0.98 * 30200 = 29596

Balance fixed costs to be recovered = 46089 - 29596 = 16493

Break even to recover balance costs = 16493/ 0.81 = 20362

Total break even units = 30200 + 20362 = 50562 units

Break even point in dollar sales = 50562 * 2.7 = 136,517

2. Required contribution margin = 46089 + 10368 = 56457

Contribution required from new facility = 56457 - 29596 = 26861

Number of units required to break even from new facility = 26861 / 0.81 = 33162 units

Unit sales needed to attain target profit = 30200 + 33162 = 63362 units

3. Contribution margin after bonus = 0.81 - 0.2 = 0.61

Desired profit = Total fixed expenses * rate of return = 46089 * 24% = 11061

No of units to break even to earn desired profit = 11061 / 0.61 = 18133 units

Unit sales needed to attain target profit = 50562 + 18133 = 68695 units