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) calculate break even point in unit's and in dollars

break even point in unit's = fixed expenses/CONTRIBUTION MARGIN PER UNIT

CONTRIBUTION margin per unit = selling price per unit - variable expenses per unit

= $130 - $91 = $39

break even point in unit's = $179400/$39=4600 units

break even point in dollars = 4600× $130 =$598000

2) An increase in variable expenses as a percentage of the selling price it would result in higher break even point

if variable expenses percentage increase then there will be a decrease in CONTRIBUTION MARGIN and also reduce in CONTRIBUTION MARGIN ratio

therefore CONTRIBUTION MARGIN ratio decreases which leads to increase in break even point

therefore answer is higher break even point due to increase in percentage in variable expenses

3) prepare two CONTRIBUTION MARGIN income statement subject to certain adjustments

​ Present situation

Particular	per unit	amount($)
Sales 8000units	$130	1040000
(-) variable expenses	($91)	(728000)
CONTRIBUTION margin	$39	312000
(-) fixed expenses		(179400)
net operating income		132600

  proposed situation

Particular	per unit	amount($)
Sales(10000)units(note 1)	$117(note 2)	1170000
(-) variable expenses	($91)	(910000)
CONTRIBUTION margin	$26	260000
(-) fixed expenses		(179400)
net operating income		80600

Note 1:

Increase sales by 25%

Therefore new sales = 8000+25%=10000units

Note 2

Reduction in selling price per unit by 10%

Therefore new selling price per unit = $130 -10%= $117

4) number of units sold with new selling price to attain target profit

Unit sales to attain target profit = target profit+fixed expenses/CONTRIBUTION MARGIN PER UNIT

New CONTRIBUTION MARGIN PER UNIT = new selling price per unit- variable expenses per unit

=$117 - $91 = $26

Unit sales to attain target profit= $179400+77000/$26

=$256400/$26= 9862units

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