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.

PART A) At present, the company is selling 15,000 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.

	Outback Outfitters Present Proposed 15,000 Stoves Stoves Total Per unit Total Per unit Sales Variable expenses Contribution margin 0 $0 0 $0 Fixed expenses Net operating income $0 $0

PART B)

Refer to the data in (3) above. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $76,000 per month? (Round up your answer to the nearest whole number.)

	Number of stoves to be sold

Answer 1

• All working forms part of the answer
• PART A

Outback Outfitters
	Present		Proposed
	15000	Stoves	18750 [ 15000 + 25%]	Stoves
	Total	Per unit	Total	Per unit
Sales	$                     16,50,000.00	$                              110.00	$                         18,56,250.00	$                                    99.00 [$ 110 – 10%]
Variable expenses	$                     11,55,000.00	$                                77.00	$                         14,43,750.00	$                                    77.00
Contribution margin	$                       4,95,000.00	$                                33.00	$                           4,12,500.00	$                                    22.00
Fixed expenses	$                       1,58,400.00		$                           1,58,400.00
Net operating income	$                       3,36,600.00		$                           2,54,100.00

• Part B

A	Target minimum net operating income	$                           76,000.00
B	Fixed expenses	$                       1,58,400.00
C=A+B	Total contribution margin required for target net income	$                       2,34,400.00
D	Contribution margin per unit after proposed changes	$                                   22.00 [calculated in Part A]
E=C/D	No. of stoves to be sold to earn target net operating income	10655 stoves [234400/22]