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All applicable problems are available with McGraw-Hill's Connect Accounting. PROBLEM 5-19 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 sell- ing 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 Required: I. 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?

Explanation / Answer

Unit selling price = $70

Unit variable expenses = $40

Units sold = 15,000 units

Fixed expenses = $540,000

1.

2. Unit Contribution margin = Unit selling price - Unit variable expenses = 70-40 = $30

Break even point in unit sales = Fixed expenses ÷ Unit Contribution margin = 540,000÷30 = 18,000 units

Break even point in dollar sales = Fixed expenses × Unit selling price ÷ Unit Contribution margin = 540,000×70÷30 = $1,260,000

3. Taking marketing studies:-

Revised selling price = 70-2 = $68

Revised units sold = 15,000+5,000 = 20,000 units

Revised Unit Contribution margin = Revised selling price - Variable expenses = 68-40 = $28

Revised Total Contribution margin = Revised Unit Contribution margin × Revised Units sold = 28×20,000 = $560,000

Revised Net operating income = Revised Total Contribution margin - Fixed expenses = 560,000-540,000 = $20,000

If the marketing studies are applied, the company can earn a maximum annual profit of $20,000.

By selling 20,000 units @ $68 per unit, the company would generate this profit.

Sales (15,000 units × $70 per unit) $1,050,000 Less: Variable expenses (15,000 units × $40 per unit) 600,000 Contribution margin 450,000 Less: Fixed expenses 540,000 Net operating income (loss) $90,000

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