Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $140 per unit. Variable expenses are $98 per stove, and fixed expenses associated with the stove total $172,200 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 18,000 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?

At present, the company is selling 18,000 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.

	Outback Outfitters Contribution Income Statement Present Proposed 18,000 Stoves Stoves Total Per unit Total Per unit 0 $0 0 $0 $0 $0

Answer 1

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Outback outfitters
Answer 1	Amount $	Note
Sales Price	140.00	A
Variable Expenses	98.00	B
Contribution margin	42.00	C=A-B
Fixed costs	172,200.00	D
Breakeven (Units)	4,100.00	E=D/C
Breakeven ($)	574,000.00	F=E*A
Answer 2
If variable expense increase then contribution will decrease. It will increase breakeven point.
Answer 3			Note
Sales Price	140.00		See A
Decrease by	10%		G
Decrease by	14.00		H=A*G
Revised Sales Price	126.00		I=A-H
Number of units sold	18,000.00		J
Increase by	25%		K
Number of units increased	4,500.00		L=J*K
Revised units sold	22,500.00		M=J+L
Income Statement	Revised	Proposed	Note
Sales Price	140.00	126.00	See A, I
Variable Expenses	98.00	98.00
Contribution margin	42.00	28.00	N
Units sold	18,000.00	22,500.00	See J, M
Contribution amount	756,000.00	630,000.00	O
Fixed costs	172,200.00	172,200.00	See D
Operating Profit	583,800.00	457,800.00	P=O-D
Decrease by		126,000.00
Operating Profit will decrease by $ 126,000 so sell price should not be reduced.
Answer 4	Amount $
Fixed costs	172,200.00		See D
Add: Target Profit	77,000.00		Q
Target Contribution	249,200.00		R=D+Q
Contribution margin	28.00		See N
Units to be sold	8,900.00		S=R/N