Changes in Fixed and Variable Costs; Break-Even and Target Profit Analysis

[LO4, LO5, LO6]

Novelties, Inc., produces and sells highly faddish products directed toward the preteen market. A new product has come onto the market that the company is anxious to produce and sell. Enough capacity exists in the company’s plant to produce 30,000 units each month. Variable expenses to manufacture and sell one unit would be $1.60, and fixed expenses would total $40,000 per month.

The Marketing Department predicts that demand for the product will exceed the 30,000 units that the company is able to produce. Additional production capacity can be rented from another company at a fixed expense of $2,000 per month. Variable expenses in the rented facility would total $1.75 per unit, due to somewhat less efficient operations than in the main plant. The product would sell for $2.50 per unit.

Required:
1. Compute the monthly break-even point for the new product in units and in total dollar sales.
2. How many units must be sold each month to make a monthly profit of $9,000?
3. If the sales manager receives a bonus of 15 cents 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 i n f ixed e xpenses?