Question

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 18,000 units and 38,000 units per month. The new toy will sell for $4.00 per unit. Enough capacity exists in the company’s plant to produce 21,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.00 , and incremental fixed expenses associated with the toy would total $25,000 per month.

Neptune has also identified an outside supplier who could produce the toy for a price of $2.75 per unit plus a fixed fee of $18,000 per month for any production volume up to 23,000 units. For a production volume between 23,001 and 43,000 units the fixed fee would increase to a total of $36,000 per month.
Required:
1. Calculate the break-even point in unit sales assuming that Neptune does not hire the outside supplier.

Answer 1

The break-even point for Neptune Company without hiring the outside supplier is 12,500 units, calculated using the formula for break-even point in units.

Step-by-step explanation:

Calculating Break-Even Point for Neptune Company

To calculate the break-even point in unit sales for Neptune Company without hiring the outside supplier, we use the formula:

Break-Even Point (units) = Fixed Expenses ÷ (Price per Unit - Variable Expense per Unit)

Fixed Expenses = $25,000 per month

Price per Unit = $4.00

Variable Expense per Unit = $2.00

Break-Even Point = $25,000 ÷ ($4.00 - $2.00)

Break-Even Point = $25,000 ÷ $2.00

Break-Even Point = 12,500 units

Therefore, Neptune Company needs to sell 12,500 units of the toy each month to break even if they do not hire the outside supplier.