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 $3.20 per unit. Enough capacity exists in the company’s plant to produce 30,300 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.02, and fixed expenses associated with the toy would total $53,131 per month.

The company's Marketing Department predicts that demand for the new toy will exceed the 30,300 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,657 per month. Variable expenses in the rented facility would total $2.24 per unit, due to somewhat less efficient operations than in the main plant.

1.

Compute the monthly break-even point for the new toy in unit sales and in dollar sales. (Round "per unit" to 2 decimal places, intermediate and final answers to the nearest whole number.)

2.

How many units must be sold each month to make a monthly profit of $12,384? (Round "per unit" to 2 decimal places, intermediate and final answer to the nearest whole number.)

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 26% on the monthly investment in fixed expenses? (Round "per unit" to 2 decimal places, intermediate and final answer to the nearest whole number.)

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 $3.20 per unit. Enough capacity exists in the company’s plant to produce 30,300 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.02, and fixed expenses associated with the toy would total $53,131 per month.

Explanation / Answer

Solution: 1. Monthly Break even units = 51,169 units Monthly Break even =$163,741 Working Notes: Contribution Margin per unit = Sales per unit - Variable cost per unit = $3.20 - $2.02 = $1.18 Fixed cost = $53,131 Part of fixed cost covered at 30,300 units = Contribution margin per unit x No. of units = $1.18 x 30,300 = $35,754 Uncovered of Fixed cost = Fixed cost - Already Covered = $53,131 - $35,754 = $17,377 Additional fixed cost for additional capacity = $2,657 New Contribution Margin per unit = Sales per unit - New Variable cost per unit = $3.20 - $2.24 = 0.96 per unit Hence, Additional no. of units to cover part of Uncovered fixed cost and additional Fixed cost Remaining Fixed cost= Uncovered of Fixed cost + Additional fixed cost =$17,377 + $2,657 =20,034 No. of units = Remaining Fixed cost/New Contribution Margin per unit = $20,034/$0.96 =20,868.75 units = 20,869 units Monthly Break even units = 20,868.75 + 30,300 = 51,169 units Monthly Break even $ = 51,169 units X $3.20 = $163,741 =$163,741 2. Units = 64,939 units in terms of $ = $207,805 Working Notes: Units must be sold each month to make a monthly profit of $12,384 over 30,300 units =(Fixed cost + Desired profit)/Contribution margin per unit =(20,869 + 12,384)/0.96 =34,638.54 =34,639 units Units to be sold each month to make a monthly profit of $12,384 =30,300 + 34,639 = 64,939 units in terms of $ = $64,939 x 3.20 =$207,804.80 or $207,805   3. Units = 70,254 units to be sold Working Notes: Return required = Fixed cost x 26% = (53,131 + 2,657) x 26% =14,504.88 =$14,505 New Contribution Margin per unit = Sales per unit - New Variable cost per unit - 0.20 (manager bonus) = $3.20 - $2.24 - $0.20 = 0.76 per unit Units must be sold each month for 26% return $ 0.20 bonus to manager above break even point =(Desired profit)/Contribution margin per unit =(14,505)/0.76 =19,085.526 =19,085 units. Hence total units to be sold Break even units + additional units = 19,085+51,169 =70,254 units Please feel free to ask if anything about above solution in comment section of the question.

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