Problem 5-31 Changes in Fixed and Variable Costs; Break-Even and Target Profit Analysis [LO4, LO5, LO6]
Novelties,
Inc., produces and sells highly faddish products directed toward the
preteen market. A new product has come onto the market that the company
is anxious to produce and sell. Enough capacity exists in the company’s
plant to produce 30,000 units each month. Variable expenses to
manufacture and sell one unit would be $1.60, and fixed expenses would
total $40,000 per month.
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The
Marketing Department predicts that demand for the product will exceed
the 30,000 units that the company is able to produce. Additional
production capacity can be rented from another company at a fixed
expense of $2,000 per month. Variable expenses in the rented facility
would total $1.75 per unit, due to somewhat less efficient operations
than in the main plant. The product would sell for $2.50 per unit.
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| 1. |
Compute the monthly break-even point for the new product in units and in total dollar sales. (Omit the "$" sign in your response.)
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| |
| Break-even point in unit sales | 50,000  units |
| Break-even point in dollar sales | $ 125,000 |
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| 2. | How many units must be sold each month to make a monthly profit of $9,000? |
| Total units to be sold | n/r  units |
| 3. |
If
the sales manager receives a bonus of 15 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?
|
| Total units to be sold | n/r units |
