PROBLEM 3-25 Changes in Fixed and VariableE L03-4, LO3-5, LO3-6) Neptune Company

Question

PROBLEM 3-25 Changes in Fixed and VariableE L03-4, 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 16,000 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of S1.000 per month. Variable expenses in the rented facility would total $1.40 per unit, due to somewhat less efficient operations than in the main plant.

Explanation / Answer

Req 1: Selling price per unt: $ 3.00 per unit Variable cost per unit at main plant: $ 1.25 per unit Variable cost per unit at rented plant: $ 1.40 per unit Contribution margin perr unit at main plant: $ 3.00 - 1.25 = $1.75 per unit Contribution margin per unit at rented plant: $ 3.00 - 1.40 = $ 1.60 per unit Units produced at main plant: 16,000 units Contribution earned from production in main plant: 16,000 units @$1.75: $ 28,000 Total fixed cost: $35,000 Remaining fixed cost to be reovered: $ 35,000 -28,000 = $7,000 (from rented plant production) Therefore, additional units to be produced at rented plant: $ 7000 / 1.60 = 4,375 units Break even point in units: 16,000+ 4,375 = 20,375 units Req 2: Desired profit: $12,000 Desired contribution (35,000+12,000) = 47,000 Less: Contribution earned from main plant 28000 Contribution to be arned from rented plant 19,000 Contribution margin per unit 1.6 Number of units to be sold from rented plant 11875 Total number of units to be sold: 16000+11875 = 27,875 units Req 3: Break even point in units: 20,375 units Sales bonus (in excess of sales above 20,375 units) 0.30 per unit Fixed cost $35,000 Desired return 25% of monthly investment Desired profits 8750 Contribution margin per unit for sales above break even = 3.00 -1.40 -0.30 = 1.30 Additional units over break even units to be sold for desired return: Desired profits / Contribution margin per unit = $8750 /1.30 = 6731 units Total number of units to be sold: 20375 +6731 = 27106 units

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