Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $100 per unit. Variable expenses are $70 per stove, and fixed expenses associated with the stove total $132,000 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 11,000 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 $75,000 per month?

Answer 1

	Selling price	100
	Less: Variable Expense	-70
	Contribution	30
Req. 1	Break even = Fixed expense / Contribution per unit
	=132000/ 30
	4400	Units
Req 2	It result in higher break even.
	Because if variable expense increase, contribution ratio decrease. Contribution margin ratio a denominator in break even calculation
Req 3	Contribution format income statement (Present Situation)
	Units Sold	11000
	Selling price	1100000
	Less: Variable Expense	-770000
	Contribution	330000
	Contribution format income statement (Present Situation)
	Units Sold	13750
	Selling price	0
	Less: Variable Expense	0
	Contribution	0
Req 4:	Target Units = (Fixed expense + target profit )/Contribution per unit
	= (132000+75000)/20
	10350	Units