Minden Company introduced a new product last year for which it is trying to find
ID: 2425555 • Letter: M
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 $91 per unit, and variable expenses are $61 per unit. Fixed expenses are $837,900 per year. The present annual sales volume (at the $91 selling price) is 25,700 units.
a. 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?
b. 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)?
Explanation / Answer
Answer a. Calculation of Annual Profit Particulars Amount Sales - (30700 Units X $89) 2732300 Less: Variable Expenses (30700 Units X $61) 1872700 Contribution 859600 Less: Fixed Costs 837900 Net profit 21700 No of Units Sold = 25700 + 5000 = 30700 units SP per Unit = 91 -2 = $89 per unit Answer b. Break Even Point (In Units) = Fixed Cost / Contribution per Unit Break Even Point (In Units) = $837900 / $28 = 29925 units Break Even Point (In $) = 29925 units X $89 = $2,663,325 Contribution Per Unit = $89 (SP per Unit) - $61 (Variable Expenses per Unit) = $28 per unit