Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $50 per unit. The contribution margin per camp stove is 36% while the fixed expenses associated with the stove total $108,000 per month. 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. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $35,000 per month. Show all computations.

Answer 1

Solution :
Outback Outfitters
Present @ 8000 units
Particulars	Calculation	Amount	per unit
Sales	(8000*50)	400000	50
Less : Variable Cost	(1-0.36)*400000	256000	32
Contribution Margin	36%	144000	18
Less : Fixed Expenses		108000
Net Opearting Income		36000
Outback Outfitters
Proposed @ 10000 units
Particulars	Calculation	Amount	Per unit
Sales	(10000*(50*90%))	450000	45
Less : Variable Cost	(10000*32)	320000	32
Contribution Margin		130000	13
Less : Fixed Expenses		108000
Net Opearting Income		22000
c. How many stoves would have sold at a new selling price to yield a minimum opearating profit of 35000
Total Sales in Stove	=	(Fixed Cost + Target Income)/Contribution per stove
	=	(108000+35000)/13
	=	11000