Question

Campfire Products sell camping equipment. One of the ocmpany's products, a camping lantern, sell for $100 per unit. Variable expenses are $65 per lantern, and fixed expenses associated with the lantern total $140,000 per month. a. Comopute the company's break even point in number of lanterns and in total sales dollars. b. At present, the company is selling 8,000 lanterns per month. The sales manager is convinced that at 10% reduction in the selling price will result in a 25% increase in the number of lanterns sold each month. Prepare two contribution income statements, one under present operating conditions, and one as operations would appear after theproposed changes. Show both total and per unit data on your statement and determine if the proposed changes will be beneficial to the company's net operating income. c. Refer to the data in (c) above. How many lanterns would have to be sold at the new selling price to yield a minimum net operating income of $72,000 per month

Answer 1

Answer to Part a.

Break Even Point (in Units) = Fixed Cost / Contribution Margin per Unit
Contribution Margin per Unit = Selling Price per Unit – Variable Expense per Unit
Contribution Margin per Unit = $100 - $65
Contribution Margin per Unit = $35

Break Even Point (in Units) = 140,000 / 35
Break Even Point (in Units) = 4,000 lantern

Break Even Point (in Sales Dollar) = Fixed Cost / Contribution Margin Ratio
Contribution Margin Ratio = Contribution Margin per Unit / Selling Price per Unit * 100
Contribution Margin Ratio = 35 / 100 * 100
Contribution Margin Ratio = 35%

Break Even Point (in Sales Dollar) = 140,000 / 0.35
Break Even Point (in Sales Dollar) = $400,000

Answer to Part b.

Answer to Part c.

Profit = Sales – Variable Cost – Fixed Cost
Let the Number of Lanterns to be sold be “X”
$72,000 = ($90 * X) – ($65 * X) - $140,000
$72,000 = $90X - $65X - $140,000
$212,000 = $25X
X = 8,480

Therefore, 8,480 Lanterns must be sold to earn a operating Income of $72,000 per month.