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 $179,400 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 8,000 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?

Answer 1

1. Break even units = Fixed costs / Contribution margin per unit

Contribution margin per unit = Sales - Variable cost = $130 - $91 = $39

Break even units = $179,400 / $39 = 4,600 units

Breakeven sales = 4,600 units x $130 = $5,98,000

2. If the variable expenses increase, contribution margin per unit will decrease. So breakeven units will increase.

3.

8,000 units	10,000 units
Particulars	Amount p.u	Amount	Particulars	Amount p.u	Amount
Sales	$       130.00	$ 10,40,000.00	Sales	$       117.00	$ 11,70,000.00
Variable cots	$          91.00	$    7,28,000.00	Variable cots	$          91.00	$    9,10,000.00
Contribution margin	$          39.00	$    3,12,000.00	Contribution margin	$          26.00	$    2,60,000.00
Fixed Costs		$    1,79,400.00	Fixed Costs		$    1,79,400.00
Net Income		$    1,32,600.00	Net Income		$       80,600.00

4. Target profit = Contribution Margin - Fixed Costs

$77,000 = Contribution margin p.u x no. of sales - $179,400

$256,400 = $26 x no. of sales

no. of sales = 9861.5 units