P3–18 Changing levels of fixed and variable costs Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. Enough capacity exists in the company’s plant to produce 16,000 units of the toy each month. Variable costs to manufacture and sell one unit would be £1.25, and fixed costs associated with the toy would total £35,000 per month.
The company’s Marketing Department predicts that demand for the new toy will exceed the 16,000 units that the company is able to produce.
Additional manufacturing space can be rented from another company at a fixed cost of £1,000 per month. Variable costs in the rented facility would total £1.40 per unit, due to somewhat less efficient operations than in the main plant. The new toy will sell for £3 per unit.
Required 1 Compute the monthly break-even point for the new toy in units and in total pound sales. Show all computations in good form.
2 How many units must be sold each month to make a monthly profit of £12,000?
3 If the sales manager receives a bonus of 10 pence for each unit sold in excess of the break-even point, how many units must be sold each month to earn a return of 25% on the monthly investment in fixed costs?