Answer:
1. Net operating loss is $63,300.
2. break even point in unit is 27,710 units while break even point in dollar sales is $2,632,450.
3. Profit is maximum at $180,700 at 50,600 units and selling price of $85 per unit.
4. Break even point in unit is 41,565 units while break even point in dollar sales is $3,533,025.
Explanation:
1. What is the present yearly net operating income or loss?
Total revenue = 25,600 × $95 = $2,432,000
Total variable expenses = 25,600 × $65 = $1,664,000
Fixed expenses = $831,300
Total expenses = Total variable expenses + Fixed expenses
= $1,664,000 + $831,300
Total expenses = $2,495,300
Net operating loss = Total revenue - Total expenses
= $2,432,000 - $2,495,300
Net operating loss = - $63,300
Therefore, net operating loss is $63,300.
2. What is the present break-even point in unit sales and in dollar sales?
Break even point in unit = Fixed costs ÷ (Unit selling price - Unit variable cost)
Note that (Unit price - Unit variable cost) refers to contribution per unit. Therefore, we have:
Break even point in unit = $831,300 ÷ ($95 - $65) = 27,710 units
Break even point in dollar = Break even point in unit × Unit selling price
Break even point in dollar = 27,710 × $95 = $2,632,450.
Therefore, break even point in unit is 27,710 units while break even point in dollar sales is $2,632,450.
3. Assuming that the marketing studies are correct, what is the maximum annual profit that the company can earn? At how many units and at what selling price per unit would the company generate this profit?
Units = 25,600 + (5,000 × n)
Where n denotes number of years.
Tota revenue = Units × [$95 - (n × $2)]
Total cost = (Units × $65) + $831,300
When n = 3,
Units = 25,600 + (5,000 × 3) = 40,600 units
Total revenue = 40,600 × [$95 - (3 × $2)] = $3,613,400
Total cost = (40,600 × $65) + $831,300 = $3,470,300
Net profit = $3,470,300 - $3,470,300 =$143,100
When n = 4,
Units = 25,600 + (5,000 × 4) = 45,600 units
Total revenue = 45,600 × [$95 - (4 × $2)] = $3,967,200
Total cost = (45,600 × $65) + $831,300 = $3,795,300
Net profit = $3,967,200 - $3,795,300 =$171,900
When n = 5,
Units = 25,600 + (5,000 × 5) = 50,600 units
Total revenue = 50,600 × [$95 - (5 × $2)] = $4,301,000
Total cost = (50,600 × $65) + $831,300 = $4,120,300
Net profit = $4,301,000 - $4,120,300 =$180,700
When n = 6,
Units = 25,600 + (5,000 × 6) = 55,600 units
Total revenue = 55,600 × [$95 - (6 × $2)] = $4,614,800
Total cost = (55,600 × $65) + $831,300 = $4,445,300
Net profit = $4,301,000 - $4,120,300 =$169,500
Therefore, profit is maximum at $180,700 at 50,600 units and selling price of $85 per unit.
4. What would be the break-even point in unit sales and in dollar sales using the selling price you determined in (3) above (e.g., the selling price at the level of maximum profits)?
Break even point in unit = $831,300 ÷ ($85 - $65) = 41,565 units
Break even point in dollar sales = 41,565 × $85 = $3,533,025.
Therefore, break even point in unit is 41,565 units while break even point in dollar sales is $3,533,025.
