Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $130 per unit. Variable expenses are $91 per stove, and fixed expenses associated with the stove total $175,500 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 20,000 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 Required 3. How many stoves would have to be sold at the new selling price to attain a target profit of $71,000 per month?

Answer 1

Selling price per unit			$130
Variable cost per unit			$91
Fixed cost			$175,500	per month
1)	Selling price	130
	Less: Variable cost	(91)
	Contribution margin per unit	39
	Fixed cost per month	175,500
	Breakeven in units=Fixed cost	175,500	4,500
	Contribution margin per unit	39
	Breakeven in Dollar sales=	Breakeven in units*Selling price=	4500*130	$ 585,000
2)	If the variable expense increases it will result in higher break even point.Increase in variable expense will result
	in lesser contribution margin per unit or lesser amount available to cover the fixed cost. Hence in order to cover the
	Fixed cost more number of units are required to be sold to break even.
3)	Present operating conditions
	Number of stoves sold per month=	20,000
	Income Statement
	Particulars	Amount
	Sales (20000*130)	2,600,000
	Less: Variable Cost (20000*91)	(1,820,000)
	Contribution Margin	780,000
	Less: Fixed Cost	(175,500)
	Profit	604,500
	Proposed Operating conditions
	New Selling Price =130 - (130*10%)	117
	New sales in units=20000+ (20000*25%)	25,000
	Income Statement
	Particulars	Amount
	Sales (25000*117)	2,925,000
	Less: Variable Cost (25000*91)	(2,275,000)
	Contribution Margin	650,000
	Less: Fixed Cost	(175,500)
	Profit	474,500
4)	New Selling price per unit	117
	Less: variable cost per unit	(91)
	Contribution Margin per unit (A)	26
	Fixed cost per month	175,500
	Add: Target Profit per month	71,000
	Total Contribution margin required (B)	246,500
	Number of units required to sold = B/A	9,481