PROBLEM 3-25 Changes in Fixed and Variable Expenses; Break-Even and Target Profi

Question

PROBLEM 3-25 Changes in Fixed and Variable Expenses; Break-Even and Target Profit Analysis LO3-4, LO3-5, LO3-6] Neptune Company produces toys and other items for use in beach and resort areas. A small, inflat- able toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $3 per unit. Enough capacity exists in the company's plant to produce 16,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.25, and fixed expenses associated with the toy would total $35,000 per month. The company's Marketing Department predicts that demand for the new toy will exceed the units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $1,000 per month. Variable expenses in the rented s than in the main plant. facility would total $1.40 per unit, due to somewhat less efficient operation

Explanation / Answer

Capacity 16000 toys p.m. Above 16000 toys p.m. Selling price/unit 3 3 Variable Expense 1.25 1.4 Contribution /unit 1.75 1.6 Fixed expenses p.m. 35000 36000 1..Monthly Break-even point= Fixed expenses/Contribution per toy 35000/1.75= 36000/1.6= 20000 22500 Toys Toys BEP in $ 20000*3= 22500*3= 60000 67500 2.. No.of toys to be sold to make a mthly. Profit of $ 12000: (Fixed expense+Target profit)/Contribution per toy 16000 toys p.m. Above 16000 toys p.m. (35000+12000)/1.75= (36000+12000)/1.6= 26857 30000 Toys Toys Capacity 16000 & below Capacity > 16000 3… Suppose no.of units sold as x x Total sales 3x 3x Variable Expense 1.25x 1.4x Bonus(variable as linked to no.of units sold (x-20000)*0.1 (x-22500)*0.1 Contribution 3x-(1.25x+((x-20000)*0.1)) 3x-(1.4x+((x-22500)*0.1)) Fixed expense 35000 36000 Profit(25%*Fixed expense) 8750 9000 Equating the above 3x-(1.25x+((x-20000)*0.1))-35000=8750 3x-(1.4x+((x-22500)*0.1))-36000=9000 (Contribution-Fixed expense=Reqd. Profit Solving for x We get the no. of units that must be sold under both situations as 25303 28500 VERIFICATION Capacity 16000 & below Capacity > 16000 3… Total sales 75909 85500 Variable Expense 31629 39900 Bonus(variable as linked to no.of units sold 530 600 Contribution 43750 45000 Fixed expense 35000 36000 Profit(25%*Fixed expense) 8750 9000 Equating the above 8750 9000 (Contribution-Fixed expense=Reqd. Profit

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