Problem 5-19A Break-Even Analysis; Pricing [LO5-1, LO5-4, LO5-5] Minden Company

ID: 2418123 • Letter: P

Question

Problem 5-19A Break-Even Analysis; Pricing [LO5-1, LO5-4, LO5-5] 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 $100 per unit, and variable expenses are $70 per unit. Fixed expenses are $834,000 per year. The present annual sales volume (at the $100 selling price) is 25,600 units. Required 1. What is the present yearly net operating income or loss?

Explanation / Answer

1)Present net operating loss

(sales - vairable cost ) units - fixed cost

= (100-70)25,600 - 834,000 = (66,000)

2) BEP (units) = 834,000/30 = 27,800 units

Sales = 27,800 *100 = $2,780,000

3) Use trial method

n=1 (98-70)30,600 - 834,000 = 22,800

n=2 (96-700 35,600 - 834,000 = 91,600

n=3 (94-70) 40,600 -834,000 = 140,400

n=4 (92-70)45,600 - 834,000 = 169,200

n=5 (90-70) 50,600 - 834,000 = 178,000

n=6 (88-70) 55,600 - 834,000 = 166,800

Maximum profit $178,000

Number of units = 50,600

Selling price = $90

4) BEP = 834,000/20 = 41,700 units

BEp (sales) 41,700 *90 = $3,753,000