Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses associated with the stove total $108,000 per month.

Required:

1. What is the break-even point in unit sales and in dollar sales?

2. If the variable expenses per stove increase as a percentage of the selling price, will it result in a higher or a lower break-even point? (Assume that the fixed expenses remain unchanged.)

3. At present, the company is selling 8,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes.

4. Refer to the data in (3) above. How many stoves would have to be sold at the new selling price to attain a target profit of $35,000 per month?

Answer 1

1)	Break Even (Units) = Fixed cost/ Contribution margin
			=108000/18
			6000	Units
	Contribution margin = selling price - variabe cost
			=50-32
			18
2)	Increase in break even: Reason-: Increase in variable cost will reduce the contribution margin which is denomitor in computing break even. When denominator decreases, break even will get increased.
3)	Contribution format income statement
		Current Operating Condition	Proposed Changes
	(No. of Units sold)	8000	10000
	Sales	400000	450000
	Less: Variable Cost	256000	320000
	Contribution Margin	144000	130000
4)	Target profit	35000
	Add: Fixed cost	108000
	Total amount to be recovered	143000
	Contribution margin	13	(45-32)
	No. of Units required to be sold for target profit	11000