Problem 20.1 A: Setting Sales Price and Computing the Break-Even Point
Thermal Tent Inc. is a newly organized manufacturing business that plans to manufacture and sell 50,000 units per yr. of a new product. The following estimates have been made of the company’s costs and expenses (other than income taxes).
Fixed Variable Per Unit
Manufacturing costs:
Direct materials………………………… $47
Direct labor…………………………….. $32
Manufacturing overhead……………..... $340,000 $ 4
Period costs:
Selling expenses………………………. $1
Administrative expenses……………… $200,000
TOTALS…………………………..= $540,000 = $84
Instructions:
a.) What should the company establish as the sales price per unit if it sets a target of earning an operating income of $260,000 by producing and selling 50,000 units during the first year of operations? (Hint: First compute the required contribution margin per unit.)
b.) At the unit sales price computed in part a, how many units must the company produce and sell to break even? (Assume all units produced are sold.)
c.) What will be the margin of safety (in dollars) if the company produces and sells 50,000 units @ the sales price computed in part a? Using the margin of safety, compute operating income @ 50,000 units.
d.) Assume that the marketing manager thinks that the price of this product must be no higher than $94 to ensure market penetration. Will setting the sales price @ $94 enable Thermal Tent to break even, given the plans to manufacture and sell 50,000 units? Explain your answer.
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