Question:
Delphi Company has developed a new product that will be marketed for the first time next year. The product will have variable costs of $16 per unit. Although the marketing department estimates that 35,000 units could be sold at $36 per unit, Delphi"s management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units a year. The fixed costs associated with the new product are budgeted at $450,000 for the year. Delphi is subject to a 40% tax rate.
Required
1. How many units of the new product must Delphi sell in the next fiscal year to break even?
2. What is the maximum net income that Delphi can earn from sales of the new product in the next fiscal year?
3. Delphi"s managers have stipulated that they will not authorize production beyond the next fiscal year unless the after-tax profit from the new product is at least $75,000. How many units of the new product must be sold in the next fiscal year to ensure continued production?
4. Regardless of your answer in part (c), assume that more than the allowed production of 25,000 units will be required to meet the $75,000 net income target. Given the production constraint (maximum of 25,000 units available), what price must be charged to meet the target income and continue production past the next fiscal year?
5. Assume that the marketing manager thinks the price you calculated in part (d) is too high. What actions could the project manager take to help ensure production of the new product past the current fiscal year?