Harry Nelson started Jefferson Building Materials (JBS) last year and began distributing a line of flooring and is attempting to find an optimal selling price. The Sales Manager of JBS suggests that the company can increase sales by 5,000 units for each $2 reduction in the selling price. JBS's present selling price is $70 per unit, and variable expenses are $40 per unit. Fixed expenses are $540,000 per year. The present annual sales volume at the $70 selling price is 15,000 units.
Answer the following:
(a) What is the present yearly net operating income or loss?
(b) What is the present break-even point in units and in dollar sales?
(c) Presuming that the Sales Manager is correct, what is the maximum profit that JBS can earn yearly? At how many units and at what selling price would JBS generate this maximum profit?
(d) What would be the break-even point in units and in sales dollars using the selling price you determined in Part (b) (This is the selling price at the level of maximum profits)? Why is this break-even point different from the break-even point you computed in Part (b)?