Minden Company introduced a new product last year for which it is trying to find
ID: 2544165 • 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 $93 per unit, and variable expenses are $63 per unit. Fixed expenses are $838,500 per year. The present annual sales volume (at the $93 selling price) is 25,800 units.
Required:
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?
Explanation / Answer
Contribution margin = Selling price per unit - variable cost per unit 93-63 = $30 Selling price per unit 93 91 89 87 85 83 Current 1 2 3 4 5 units sold (a) 25,800 30,800 35,800 40,800 45,800 46,300 Contribution margin pu (b) 30 28 26 24 22 20 total contribution c= a*b 774000 862400 930800 979200 1007600 926000 less :Fixed expense -838500 -838500 -838500 -838500 -838500 -838500 net income -64500 23900 92300 140700 169100 87500 Thus we see at 45,800 units at selling price of $85 maximum profit of $169,100 is attained Maximum annual profit = 169100 units= 45,800 units Selling price per unit = $85