Minden Company introduced a new product last year for which it is trying to find
ID: 2447356 • 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 $70 per unit, and variable expenses are $40 per unit. Fixed expenses are $540,000 per year. The present annual sales volume (at the $70 selling price) is 15,000 units.
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)?
Explanation / Answer
1. What is the present yearly net operating income or loss?
Present yearly net operating income or loss = (Sell price - Variable cost per unit) * Sales Volume - Fixed Cost
Present yearly net operating income or loss = (70-40)*15000-540000
Present yearly net operating income or loss = -90000
2. What is the present break-even point in unit sales and in dollar sales?
Present break-even point in unit sales = Fixed Cost/(Sell price - Variable cost per unit)
Present break-even point in unit sales = 540000/(70-40)
Present break-even point in unit sales = 18000
Present break-even point in dollar sales = Present break-even point in unit sales*Sell price
Present break-even point in dollar sales = 18000*70
Present break-even point in dollar sales = $ 1,260,000
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?
Maximum annual profit that the company can Earn = $ 270000
No of Unit = 45000
selling price per unit = $ 58
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)?
Break-even point in unit sales = Fixed Cost/(Sell price - Variable cost per unit)
Break-even point in unit sales = 540000/(58-40)
Break-even point in unit sales = 30000
Break-even point in dollar sales =Break-even point in unit sales*Sell price
Break-even point in dollar sales = 30000*58
Break-even point in dollar sales = $ 1,740,000
Unit Sale Price Unit Variable Cost Unit Fixed Cost Net Operating Profit [a] [b] [c] [d] [ (a-b)*c - d] 70 40 15000 540000 -90000 68 40 20000 540000 20000 66 40 25000 540000 110000 64 40 30000 540000 180000 62 40 35000 540000 230000 60 40 40000 540000 260000 58 40 45000 540000 270000 56 40 50000 540000 260000 54 40 55000 540000 230000