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 $132,000 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 10,000 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 $75,000 per month?

Answer 1

• Requirement 1

A	Sale price	$100
B	Variable Cost	$70
C = A - B	Unit contribution margin	$30
D	Fixed Cost	$132,000
E = D/C	Break even point in units	4400	Answer
F = E x A	Break even point in $	$440,000	Answer

• [2]

If variable expenses per stove increase, the contribution margin per unit decreases.
This means that denominator value in calculating break even point will decrease.
This will increase the break even point.
Answer = HIGHER Break even point.

• [3]

	Present		Proposed
	10000	stoves	12500 [10000 + 25%]	stoves
	Total	per unit	Total	per unit
Sale	$1,000,000	$100	$1,125,000	$90
Variable cost	$700,000	$70	$875,000	$70
Contribution margin	$300,000	$30	$250,000	$20
Fixed cost	$132,000		$132,000
Net Income or net operating income	$168,000		$118,000

• [4]

A	Sale price	$90
B	Variable Cost	$70
C = A - B	Unit contribution margin	$20
D = 132000 + 75000	Fixed Cost + Target Profits	$207,000
E = D/C	Units to be sold	10350	Answer