Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $100 per unit. Variable expenses are $70 per stove, and fixed expenses associated with the stove total $144,000 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 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 $77,000 per month?

	Outback Outfitters Contribution Income Statement Present Proposed 20,000 Stoves ? Stoves Total Per unit Total Per unit Sales $2,000,000 ? $25,000 ? Variable expenses 1,400,000 ? ? ? Contribution margin 600,000 $0 25,000 $0 Fixed expenses 144,000 144,000 Net operating income $456,000 $(119,000)

Answer 1

Ans:

We have been provided with the information as follow

	Total	Per Unit	%
Sales ( units)		$100	100%
Less Variable Expenses		70	70%
Contribution Margin		30	30%
Less Fixed Expenses	144,000
Net Operating Income

Now we will compute the Break even point Unit sales as follow

Break even point Unit sales

= BREAK-EVEN ANALYSIS (B/E)

B/E Sales = all costs + $0 profit

B/E units sold     = Fixed expenses + 0 / unit CM

Now put the figures in to the formula as under

= 144,000/30

=4800 units

2

If the variable Exp....lower Break even point

answer: result in to higher break even point

3

If sales price reduced then new Contribution ratio will be as under

	Total	Per Unit	%
Sales ( units)(100-10%(100))		$90	100%
Less Variable Expenses		70	78%
Contribution Margin		20	22%
Less Fixed Expenses	144,000

we will make table to find net income as follow

Outback Offlitters
	Present		Proposed
	20,000	Stoves	25000	Stoves
	Total	Per Unit	Total	Per Unit
Sales	2000,000	100	2250,000	90
less: variable cost	1400,000	70	1750,000	70
contribution	600,000	30	500,000	20
Less: Fixed Cost	144,000		144,000
Net Income	456,000		356,000

4

TARGET PROFIT ANALYSIS

Target Profit Sales = all costs + Profit

Units sold to attain the target profit = (Fixed expenses + target profit)/ unit CM

Sales revenue to attain the target profit = (Fixed expenses + target profit)/ CM%

Now put the figure in to the formula as under

Units sold to attain the target profit

= (Fixed expenses + target profit)/ unit CM

=144,000+77000 /20

= 11,050 units