Minden Company introduced a new product last year for which it is trying to find
ID: 2557854 • 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 $97 per unit, and variable expenses are $67 per unit. Fixed expenses are $839,700 per year. The present annual sales volume (at the $97 selling price) is 25,300 units Required 1. What is the present yearly net operating income or loss? 2. What is the present break-even point in unlt 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)? Complete this question by entering your answers in the tabs below. Required 1Required 2 Required 3Required 4 What would be the break-even point in unit sales and in dollar sales using the selling price you determined in Required (3) (e.g., the selling price at the level of maximum profits)? (Do not round intermediate calculations.) Break-even point in units Break-even point in dollar sales Required 3 Required4Explanation / Answer
1. Calculation of present yearly net operating income or loss
Selling price per unit = $97
Variable cost per unit = $67
Therefore, Contribution margin per unit = Selling price - Variable expense = $97 - $67 = $30 per unit
Total contribution margin = Contribution margin per unit * Number of units sold = $30 per unit * 25,300 units = $759,000
Fixed Expense = $839,700
Hence, Operating Loss = Contribution Margin - Fixed Expense = $759,000 - $839,700 = $80,700
2. Calculation of present break even point in unit sales and in dollar sales
Break even point in Units = Total Fixed Expense/Contribution Margin Per unit = $839,700/$30 per unit = 27,990 units
Break even points in Amount = Break even point in units * sales price per unit = 27,990 units * $97 per unit = $2,715,030
3. Assuming marketing studies are correct:
Calculation of maximum profit that the company can earn,
New selling price per unit = $95 ($97 - $2)
Variable expense per unit = $67
Therefore, contribution margin per unit = $95 - $67 = $28
Total contribution margin = $28 * 30,300 units = $848,400
Fixed Expense = $839,700
Hence profit = $848,400 - $839,700 = $8,700
Number of Units sold = 30,300 units (25,300 units + 5,000 units)
Selling price per unit = $97 - $ 2 = $95
4. Calculation of break even point in unit sales and in dollar sales using the selling price determined in step 3 above.
Break even point in Units = Total Fixed Expense/Contribution Margin Per unit = $839,700/$28 per unit = 29,990 units
Break even points in Amount = Break even point in units * sales price per unit = 29,990 units * $95 per unit = $2,849,050