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 $93 per unit, and variable expenses are $63 per unit. fixed expenses are $835,500 per year. the present annual sales volume (at the $93 selling price) is 25,400 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. The present yearly net operating loss is $73,500.

Net operating Profit/(loss) = (Selling Price × No. of units sold) - [(Variable Cost × No. of units sold) + Fixed Cost]

Net Profit/Loss = 2362200 - (1600200 + 835500 )

Net Loss = (-$73,500).

2. The present break even point in unit sales is 27,850 units and $25,90,050 in dollar sales.

Break Even Point = Fixed Costs / (Sales price per unit - Variable Cost per unit)

= $835,500/($93 -$63)

= 27,850 units

Break Even Sales = Break Even Point × Selling Price per unit

= 27,850 × 93

= 2590050

3. The company can earn a maximum profit of $15,700 if the company sells 30,400 units at $91 per unit.

Net operating Profit/(loss) = (Selling Price × No. of units sold) - [(Variable Cost × No. of units sold) + Fixed Cost]

Net Profit/Loss = 2766400 - (1915200 + 835500 )

Net Profit = 15700

4. The new break even point in unit sales is 29,839 units and $27,15,375 in dollar sales.

Break Even Point = Fixed Costs / (Sales price per unit - Variable Cost per unit)

= $835,500/($91 -$63)

= 29839.28571 units or 29,839 units approximately

Break Even Sales = Break Even Point × Selling Price per unit

= 29,839 × 91

= $27,15,375 .

Answer 2

1. The present net operating loss is $73,500.

2. The present break-event point is 27,850 units and present break-even sales are $2,590,050.

3. The company would earn maximum profits of $15,700 with units of sale of 30,400 at a $91 price.

4. The new break-even point is 271, 5394 units, and new break-even sales are $271,5349.

Given information:

Sales would be increased by $5000.

A reduction in price would be $2.

The present selling price is $93 and the variable expense is $63 per unit.

Fixed expenses are $835,500 annually.

Presently, the sales volume is 25,400 at a $93 selling price.

1. The net operating income at present is computed as follows:

$selling\ price* units\ sold\\= 25,400*93\\=2,362,200$

Now,

$variable\ cost*unit\ sold+fixed\ cost\\= 25,400*63+835,500\\=2,435,700$

Net loss would be derived as:

$2,362,200-2,435,700\\=-73,500$

2. The present break-even point would be calculated as follows:

$BEP=\frac{835,500}{93-63} \\=27,850$

Hence, the current BEP would be 27,850 units.

Now, break-even sales would be derived by multiplying BEP with the selling price per unit.

$27,850*93\\2,590,050$

Hence, BES would be $2,590,050.

3. The maximum annual profit in the case of the correct marketing study.

Firstly compute the new selling price by subtracting the sale price reduction from the current price.

$93-2\\=91$

Hence, the new selling price per unit would be $91.

Now, compute the number of units sold at $91

$5000+25,400\\30,400$

Therefore, maximum profit by selling 30,400 units at $91 price would be

$91*30,400-(63*30,400+835,500)\\=2,766,400-2,750,700\\=15700$

Hence, the new net profit would be $15,700.

4. The new break-even point would be

$BEP=\frac{835,500}{91-63} \\29,839$

Now, the new break-even sales would be:

$BES=29,839*91\\=2715349$

Hence, the break-even sales with the new marketing study would be $271,5349.

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