Neptune Company produces toys and other items for use in beach and resort areas.

Question

Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $2.60 per unit. Enough capacity exists in the company's plant to produce 30,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be SI.66, and fixed expenses associated with the toy would total $41,800 per month. The company's Marketing Department predicts that demand for the new toy will exceed the 30,000 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,090 per month. Variable expenses in the rented facility would total $1.82 per unit, due to somewhat less efficient operations than in the main plant. Required: Compute the monthly break-even point for the new toy in unit sales and in dollar sales. How many units must be sold each month to make a monthly profit of $9,750? 3. If the sales manager receives a bonus of 20 cents for each unit sold in excess of the break-even point, how many units must be sold each month to cam a return of 25% on the monthly investment in fixed expenses?

Explanation / Answer

Here is the answer-
If first facility is used to capacity, sales and cost information would be:

78,000 (30,000 x 2.60) total sales
- 41,800 fixed costs
- 49,800 (30,000 x 1.66) variable costs
= ($13,600) loss
So you have to sell enough in the second factory to make up for the loss and to cover the new fixed costs.
2.60 - 1.82 = $.78 contribution margin
13,600 + 2,090 = $15,690 costs that need to be covered
15,690 / 0.78 = 20,115.38 units to be sold in second facility

Break-even point in unit sales 20,115 + 30,000 = 50,115 units
Break-even point in dollar sales 50,115 x 2.60 = $130,299

2. How many units must be sold each month to make a monthly profit of $9,750?

Now the costs that need to be covered are in the second facility are:
$9,750
We're still using the contribution margin from the second facility.
9,750 / .78 = 12,500 units more than breakeven

12,500 + 50,115 = 62,615 total units to be sold

3.
If the sales manager receives a bonus of 20 cents for each unit sold in excess of the break-even point, how many units must be sold each month to earn a return of 25% on the monthly investment in fixed expenses?

(41,800 + 2,090) x 25% = $10,972.5 income needed above breakeven point
Above the breakeven point the new variable costs will be 1.82 + 0.20 = $2.02
2.60 - 2.02 = $0.58 contribution margin for sales above breakeven point
10,972.5 / 0.58 = 18,918 unit sales need above breakeven point

18,918 + 50,115 = 69,033 unit sales needed

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.