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Homework answers / question archive / Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers
Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The company’s Marketing Department estimates that demand for the new toy will range between 15,000 units and 40,000 units per month. The new toy will sell for $8.00 per unit. Enough capacity exists in the company’s plant to produce 20,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $4.00 , and incremental fixed expenses associated with the toy would total $32,000 per month.
Neptune has also identified an outside supplier who could produce the toy for a price of $3.00 per unit plus a fixed fee of $49,000 per month for any production volume up to 20,000 units. For a production volume between 20,001 and 45,000 units the fixed fee would increase to a total of $98,000 per month.
Required:
1. Calculate the break-even point in unit sales assuming that Neptune does not hire the outside supplier.
2. How much profit with Neptune earn assuming:
a. It produces and sells 20,000 units.
b. It does not produce any units and instead outsources the production of 20,000 units to the outside supplier and then sells those units to its customers.
3. Calculate the break-even point in unit sales assuming that Neptune plans to use all of its production capacity to produce the first 20,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 20,000 additional units.
4. Assume that Neptune plans to use all of its production capacity to produce the first 20,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 20,000 additional units.
a. What total unit sales would Neptune need to achieve in order to equal the profit earned in requirement 2a?
b. What total unit sales would Neptune need to achieve in order to attain a target profit of $50,500 per month?
c. How much profit will Neptune earn if it sells 40,000 units per month?
d. How much profit will Neptune earn if it sells 40,000 units per month and agrees to pay its marketing manager a bonus of 20 cents for each unit sold above the break-even point from requirement 3?
5. If Neptune outsources all production to the outside supplier, how much profit will the company earn if it sells 40,000 units?
Answer:
| Req 1: | Break-even point in unit sales- Without hiring | 8,000 | Units | |
| Working Note 1: | ||||
| Break even = Fixed cost / Contribution per unit | ||||
| Incremental fixed fee | 32,000 | |||
| Selling price | 8 | |||
| Less: Variable cost | 4 | |||
| Contribution per unit | 4 | |||
| Break-even point in unit sales- Without hiring | 8,000 | UNITS | ||
| Req 2-a | Profit if produces and sell | 48,000 | ||
| Req 2-b | Profit if outsources production and sells | 51,000 | ||
| Make and sell(2a) | Buy and sell(2b) | |||
| Sales Revenue | 160,000 | 160,000 | ||
| Less: Variable cost | 80,000 | 60,000 | ||
| Contribution margin | 80,000 | 100,000 | ||
| Less: Fixed cost | 32,000 | 49,000 | ||
| Net Income | 48,000 | 51,000 | ||
| Req 3 | Break-even point in unit sales- With hiring | 20,200 | Units | |
| For the first 20000 Units | ||||
| Contribution per unit | 4.0 | |||
| Above 20000 Units | ||||
| Contribution per unit | 5 | |||
| Fixed cost For the first 20000 Units | 32,000 | |||
| Fixed cost for Above 20000 Units | 49,000 | |||
| Total Fixed cost | 81,000 | |||
| Less: contribution margin For the first 20000 Units | 80,000 | |||
| Remaining uncovered cost | 1,000 | |||
| Divided by CM per unit if hired | 200 | Units | ||
| Break-even point in unit sales- With hiring | 20,200 | Units | ||
| Req 4-a | Total Units Sales | 29,800 | Units | |
| Target Units = (Total Fixed cost + Target Profit)/Contribution per unit | ||||
| Total Fixed cost | 81,000 | |||
| Target Profit | 48,000 | |||
| Total amount to be covered | 129,000 | |||
| Less: contribution margin For the first 20000 Units | 80,000 | |||
| Remaining uncovered cost | 49,000 | |||
| Divided by CM per unit if hired | 9,800 | |||
| Total Units Sales | 29,800 | |||
| Req 4-b | Total Units Sales To achieve target profit of $50500 | 30,300 | ||
| Target Units = (Total Fixed cost + Target Profit)/Contribution per unit | ||||
| Total Fixed cost | 81,000 | |||
| Target Profit | 50,500 | |||
| Total amount to be covered | 131,500 | |||
| Less: contribution margin For the first 20000 Units | 80,000 | |||
| Remaining uncovered cost | 51,500 | |||
| Divided by CM per unit if hired | 10,300 | |||
| Total Units Sales | 30,300 | |||
| Req 4-c | Net Operating INCOME | 99,000 | ||
| Make and sell | Buy and sell | Total | ||
| Units | 20,000 | 20,000 | 40,000 | |
| Sales Revenue | 160,000 | 160,000 | 320,000 | |
| Less: Variable cost | 80,000 | 60,000 | 140,000 | |
| Contribution margin | 80,000 | 100,000 | 180,000 | |
| Less: Fixed cost | 32,000 | 49,000 | 81,000 | |
| Net Income | 48,000 | 51,000 | 99,000 | |
| Req 4-D | Net operating Income-Bonus to marketing manager | 95,040 | ||
| Net Operating income without bonus | 99,000 | |||
| Units eligible for bonus | 19,800 | (Total units - break even units as per Req 3) | ||
| Bonus amount | 3,960 | (Units eligible * bonus per unit) | ||
| Net Income after bonus | 95,040 | |||
| Req 5 | Net Operating fully outsourced | 102,000 | ||
| Buy and sell | ||||
| Units | 40,000 | |||
| Sales Revenue | 320,000 | |||
| Less: Variable cost | 120,000 | |||
| Contribution margin | 200,000 | |||
| Less: Fixed cost | 98,000 | |||
| Net Income | 102,000 | |||
