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 35,000 units per month. The new toy will sell for $3 per unit. Enough capacity exists in the company’s plant to produce 18,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.00, and incremental fixed expenses associated with the toy would total $22,000 per month.
Neptune has also identified an outside supplier who could produce the toy for a price of $1.75 per unit plus a fixed fee of $15.000 per month for any production volume up to 20,000 units. For a production volume between 20,001 and 40,000 units the fixed fee would increase to a total of $30,000 per month.
Required:
1. Calculate the breakeven post in unit sales assuming that Neptune does not hire the outside supplier.
2. How much profit will Neptune earn assuming:
a. It produces and sells 18.000 units.
b. It does not produce any units and instead outsources the production of 18.000 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 18,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 17.000 additional units.
4. Assume that Neptune plans to use all of its production capacity to produce the first 18.000 units that it sells and that it also commits to hiring the outside supplier to produce up to 17.000 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 $ 16,500 per month? |
c. How much profit will Neptune earn if it sells 35,000 units per month?
d. How much profit will Neptune earn if it sells 35,000 units per month and agrees to pay its marketing manager a bonus of 10 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 35,000 units?
Neptune Company has developed a new inflatable toy and is looking to analyze its financial performance under different scenarios, including in-house production and outsourcing to an external supplier. In this essay, we will address the various questions posed to evaluate Neptune’s financial situation.
To calculate the breakeven point without hiring the outside supplier, we need to consider the fixed and variable costs. The contribution margin per unit can be calculated as follows: Contribution Margin per Unit = Selling Price – Variable Expenses = $3 – $1 = $2 per unit
Breakeven Point (in units) = Fixed Expenses / Contribution Margin per Unit Breakeven Point = $22,000 / $2 = 11,000 units
To calculate profit when Neptune produces and sells 18,000 units in-house, we can use the following formula: Profit = (Selling Price – Variable Expenses) * Units Sold – Fixed Expenses Profit = ($3 – $1) * 18,000 – $22,000 = $36,000 – $22,000 = $14,000
b. Outsourcing Production of 18,000 Units: When Neptune outsources production, the profit can be calculated as follows: Profit = (Selling Price – Supplier Cost) * Units Sold – Fixed Expenses Profit = ($3 – $1.75) * 18,000 – $22,000 = $18,000 – $22,000 = -$4,000 (loss)
If Neptune produces 18,000 units in-house and commits to hiring the outside supplier for up to 17,000 additional units, the break-even point changes. The contribution margin remains the same, but fixed expenses may increase depending on the outsourcing volume. The break-even point in this scenario is specific to the production capacity used.
To equal the profit earned in (2a), Neptune needs to sell units that generate a profit of $14,000.
b. To attain a target profit of $16,500 per month, Neptune needs to calculate the sales volume required using the following formula: Target Sales Volume = (Target Profit + Fixed Expenses) / Contribution Margin per Unit Target Sales Volume = ($16,500 + $22,000) / $2 = 19,750 units
c. Profit when selling 35,000 units per month can be calculated using the profit formula mentioned earlier.
d. If Neptune sells 35,000 units and pays a bonus of $0.10 per unit above the break-even point from requirement (3), the bonus cost would be: Bonus Cost = Bonus per Unit * (Units Sold – Break-even Point from (3)) Bonus Cost = $0.10 * (35,000 – Break-even Point from (3)) Add the bonus cost to the profit calculated in (c) to find the final profit.
If Neptune outsources all production to the outside supplier and sells 35,000 units, we can calculate profit using the profit formula mentioned earlier.
Neptune Company faces various financial scenarios based on its production and outsourcing decisions. Careful analysis is crucial to determine the most profitable option, considering factors such as production capacity, costs, and target profits. By calculating these scenarios, Neptune can make informed decisions regarding its new inflatable toy’s production and profitability.
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