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	Income Statement
		Per unit
	Sales	$                 130.00
	Variable expenses	$                   91.00
	Contribution Margin	$                   39.00
	Fixed expenses	$         1,79,400.00
	Break-even point in units($179,400/$39)	4,600	units
	Break-even point dollars(4,600 units*$130)	$              5,98,000
2	If the Variable expense per units is increased as a percentage of sales then it means that the Contribution margin per units is decreasing
	If that happens it will result into a higherBreak-even Point
3	Income Statement(at 8,000 units)
		Total	Per unit
	Sales	$       10,40,000.00	$                      130.00
	Variable expenses	$         7,28,000.00	$                        91.00
	Contribution Margin	$         3,12,000.00	$                        39.00
	Fixed expenses	$         1,79,400.00
	Net Operating Income	$         1,32,600.00
	Income Statement(at 10,000 units)
		Total	Per unit
	Sales	$       11,70,000.00	$                      117.00
	Variable expenses	$         9,10,000.00	$                        91.00
	Contribution Margin	$         2,60,000.00	$                        26.00
	Fixed expenses	$         1,79,400.00
	Net Operating Income	$            80,600.00
	Contribution Margin ratio($26/$117)
4	Target Net Operating Income	$                 77,000
	Add:Fixed expenses	$              1,79,400
	Contribution Margin	$              2,56,400
	Sales($256,5400/22.222222%)	$            11,53,800
	Sales in units($1,153,800 / $117)	9862	units