Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $120 per unit. Variable expenses are $84 per stove, and fixed expenses associated with the stove total $169,200 per month.

Required:

1.

Compute the company’s break-even point in unit sales and in dollar sales Break-Even Point Number of stoves Total sales dollars . 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.) Higher break-even point Lower break-even point 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. Outback Outfitters Present Proposed 11,000 Stoves Stoves Total Per unit Total Per unit

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 $75,000 per month? (Round your answer to the nearest whole number.)

	Number of stoves to be sold

Answer 1

• All working forms part of the answer
• Amounts are in $
• Requirement 1

Sales price per unit	$120
(-) Variable cost per unit	$84
Contribution margin per unit	$36

A	Fixed cost	$169200
B	Contribution margin per unit	$36
C=A/B	Break Even point in number of stoves	4700
D	Sales price per unit	$120
E=C x D	Break Even point in total sales dollars	$564000

• Requirement 2

If the variable expenses per stove increase as a percentage of the selling price, it will result in Higher Break Even point BECAUSE, increase in variable cost will lead to lower contribution margin (denominator for calculating BEP).

• Requirement 3

Outback Outfitters
	Present		Proposed
	11,000	Stoves	[11000 + 25%] 13750	Stoves
	Total	Per unit	Total	Per unit
Sales revenue	$1320000	$120	$1485000	[$120 – 10%] $108
(-) Variable cost	$924000	$84	$1155000	$84
Contribution margin	$396000	$36	$330000	$24
(-) Fixed cost	$169200		$169200
Net Income	$226800		$160800

• Requirement 4

A	New targeted operating income	$75000
B	Fixed Cost	$169200
C=A+B	Total contribution margin required	$244200
D	New contribution margin per unit	$24
E=C/D	Number of stoves to be sold	10175