Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $90 per unit. Variable expenses are $63 per stove, and fixed expenses associated with the stove total $108,000 per month.

Required:
1.	Compute the company’s 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.)
	Higher break-even point Lower break-even point

3.	At present, the company is selling 10,000 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 (3) above. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $71,000 per month? (Round up your answer to the nearest whole number.)

     

Answer 1

Answer:
Required
1	Break-even point in units and dollars
	Selling price	$                               90
Less:	Variable cost	$                               63
	Contribution	$                               27
	Fixed cost	$                    108,000
	Break-even point in units	4000	Units
		($108,000/$27)
	Break-even point in dollars	$              360,000.00
		(4000*$90)
2	If the variable expenses per stove increase as a percentage of the selling price, will it result in a higher break-even point.
	Higher break-even point
3	Contribution format Income Statement
		Present		Proposed
	Sales Unit	10,000		12,500	(10,000*125%)
	Sale price per unit	$                         90.00		$                         81.00	($90*90%)
	Sales revenue	$              900,000.00	(10,000*$90)	$          1,012,500.00	(12,500*$81)
Less:	Variable cost	$              630,000.00	($63*10,000)	$              787,500.00	($63*12,500)
	Contribution margin	$              270,000.00	(900,000-630,000)	$              225,000.00	(1,012,500-787,500)
Less:	Fixed cost	$              108,000.00		$              108,000.00
	Net income	$              162,000.00	($270,000-108,000)	$              117,000.00	(225,000-108,000)
4	Units to to sold to earn an income of $71,000	=(Fixed cost+ Net profit)/Contribution
		=(108,000+71,000)/$27
		6,630	Units