Question

Campfire Products sells camping equipment. One of the company's products, a camping lantern, sells for $100 per unit. Variable expenses are $65 per lantern, and fixed expenses assoiciated with the lantern total $140,000 per month.

A) Compute 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 a 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 conditions and one as operations would appear after the proposed changes. Show both total and per unit data on your statements and determine if the proposed changes will be beneficial to the company's net operating income.

C) Refer to the data in b 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

Solution A:

Selling price per unit = $100

Variable cost per unit = $65

Contribution margin per unit = $100 - $65 = $35

Fixed expenses = $140,000

Break even point (Nos of lanterns) = Fixed expenses / contribution per unit = $140,000 / $35 = 4000 lanterns

Breakeven point (In Sales dollars) = Breakeven point in units * Selling price per unit = 4000*$100 = $400,000

Solution B:

Contribution margin income statement - Present condition (Selling Price $100)
Particulars	Per Unit	Total
Sales Revenue (8000*$100)	$100.00	$800,000.00
Variable Cost	$65.00	$520,000.00
Contribution Margin	$35.00	$280,000.00
Fixed Expenses		$140,000.00
Net Operating Income		$140,000.00

Contribution margin income statement - Proposed condition (Selling Price $90)
Particulars	Per Unit	Total
Sales Revenue (10000*$90)	$90.00	$900,000.00
Variable Cost	$65.00	$650,000.00
Contribution Margin	$25.00	$250,000.00
Fixed Expenses		$140,000.00
Net Operating Income		$110,000.00

As net operating income is decreased by $30,000 ($140,000 - $110,000) under proposed situation, therefore proposed changes in selling price will not be beneficial to the company.

Solution C:

Contribution margin per unit under proposed situation = $25

Target net operating income = $72,000

Target contribution = $72,000 + $140,000 = $212,000

Nos of lanterns to be sold to acheive target net operating income = Target contribution / contribution per unit

= $212,000 / $25 = 8480 lanterns