Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The companys Marketing Department estimates that demand for the new toy will range between 17,000 units and 37,000 units per month. The new toy will sell for $4.00 per unit. Enough capacity exists in the companys plant to produce 20,000 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 22,000 units. For a production volume between 22,001 and 42,000 units the fixed fee would increase to a total of $36,000 per month.

Required:

4. Assume that Neptune plans to use all of its production capacity to produce the first 20,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 17,000 additional units.

c. How much profit will Neptune earn if it sells 37,000 units per month?

d. How much profit will Neptune earn if it sells 37,000 units per month and agrees to pay its marketing manager a bonus of 30 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 37,000 units?

1. Break-even point in unit sales - without hiring 2a. Profit if produces and sells 2b. Profit if outsources production and sells 3. Break-even point in unit sales - hiring 4a. Total unit sales 4b. Total unit sales to achieve a target Profit of $17,500 4c. Net operating income 4d. Net operating income - bonus to marketing manager 5. Net operating income - fully outsourced 12,500 units $ 15,000 $7,000 22,400 units 34,400 units 36,400 units $ 31,000 X $ 26,620 X $ 46,250 X