P&Q Company has provided you the following information. Monthly fixed expenses are $5,000 USD and variable expenses per unit are $25 USD. Their manufacturing capacity is only4,000 units per month and they are estimating that they will be able to sell all units manufactured each month.
1. If this is true, what price per unit will earn P&Q a monthly income of exactly $20,000 USD?
2. After P&Q's first month of operations, they only sold 2,000 units of production. Calculate what their net operating income was at 2,000 units using the price per unit you calculated above.
3. The 2,000 units sold last month is concerning for P&Q. They want to be earning more money than they made last month! P&Q conducted marketing research and their marketing people have assured them that if they reduce price by $2 per unit, they will be able to increase units ales by 25%. You need to run the numbers and let P&Q management know if they should move forward with this price reduction plan.
4. What is the margin of safety percentage (as a percent of sales) at this new pricing and new sales level (new pricing is $2 less per unit with a 25% increase in units sold).
5. What is the degree of operating leverage (this is a percentage) at this new pricing and sales level (new pricing is $2 less per unitwith a 25% increase in units sold)?
6. How do you use degree of operating leverage to determine the total increase in net operating income for a 30% increase in sales?
7. If at this new pricing level, the marketing/sales people were able to sell at full capacity, what would total net operating income be at that time?