Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $110 per unit. Variable expenses are $77 per stove, and fixed expenses associated with the stove total $158,400 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 14,000 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 $74,000 per month?

Answer 1

1.

	Particulars	Amount
A	Selling price	$                  110
B	variable cost	$                    77
C = A-B	contribution	$                    33

Break-even point in unit sales	= fixed costs /contribution per unit	units
Break-even point in unit sales	158400/33	4800

Break-even point in dollar sales	= fixed costs /contribution per unit * Selling price	Amount
Break-even point in dollar sales	158400*110/33	528,000

2. if the percentage of variable cost increases to selling price then it would result in a lower contribution as the increased variable cost gives lower contribution margin.

when the product has a lower contribution margin, it requires more number of units to cover the fixed costs incurred by the company Hence we need a higher break-even point

3.

Normal scenario		10% price reduction scenario
	Particulars	Units	Per unit	Amount			Particulars	Units	Per unit	Amount
A	Selling price	14000	$      110	$ 15,40,000		A	Selling price	17500	$        99	$ 17,32,500
B	variable cost	14000	$        77	$ 10,78,000		B	variable cost	17500	$        77	$ 13,47,500
C = A-B	contribution		$        33	$    4,62,000		C = A-B	contribution		$        22	$    3,85,000
D	Fixed cost	158400		D	Fixed cost	158400
E = C-D	Margin	$    3,03,600		E = C-D	Margin	$    2,26,600

* in 10% price reduction scenario revised units = 14000 + 25% of 14000 = 17500

revised price = 110 - 10% * 110 = 99

From the above tables, we can observe that the margin is higher in normal scenario than when the price is reduced hence we should not make changes to the current scenario

4.

	Particulars	Amount
A	Target profit	$ 74000
B	Fixed cost	$ 158400
C = A+B	Total	$ 232400
D	Contribution under revised conditions	$ 22
E = C/D	Number of units required for making 74000 profit	10,564 units