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 $167,700 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 9,000 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 $70,000 per month?

Answer 1

1.
Contribution margin per unit = Selling price per unit - Variable cost per unit = 130 - 91	39
Contribution margin ratio = Contribution margin per unit / Selling price per unit = 39/130	30%
	Break-Even Point
Number of stoves = Total Fixed cost / Contribution margin per unit = 167700 / 39	4300
Total sales dollars = Total fixed costs / Contribution margin ratio = 167700 / 30%	559000

2.

If the variable expense per stove increases as a percentage of the selling price and the fixed costs remains unchanged then it will result in higher break-even point, because the contribution margin per unit will decrease which will lead to higher break-even point

3.
Proposed selling price = Present selling price * ( 1 - % reduction ) = 130 * ( 1 - 10% )	117
Proposed sales of stoves = Present sales of stoves * ( 1 + % increase ) = 9000 * ( 1 + 25% )	11250

Outback Outfitters
	Present		Proposed
	9000	Stoves	11250	Stoves
	Total	Per unit	Total	Per unit
Sales	1170000	130	1316250	117
Variable costs	819000	91	1023750	91
Contribution margin	351000	39	292500	26
Fixed costs	167700		167700
Net operating income	183300		124800

4.
Number of stoves to be sold = ( Target profit + Fixed costs ) / Contribution margin per unit = ( 70000 + 167700 ) / 26	9142