Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $140 per unit. Variable expenses are $98 per stove, and fixed expenses associated with the stove total $168,000 per month.

Required:

1. What is the 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.)
3. At present, the company is selling 13,000 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 Required 3. How many stoves would have to be sold at the new selling price to attain a target profit of $70,000 per month?

Answer 1

Answer:

1.

Selling Price = $140 per unit

Variable Expenses = $98 per unit

Contribution Margin per unit = Selling price per unit - Variable expenses per unit = $140 - $98 = $42 per unit

Contribution Margin ratio = Contribution Margin per unit / Selling price per unit = $42 / $140 = 30%

Fixed cost = $168,000

Break-even (Units) = Total Fixed cost / Contribution Margin per unit

                                   = $168,000 / $42

                                   = 4,000 stoves

Break-even (Dollars) = Total Fixed cost / Contribution Margin ratio

                                     = $168,000 / 30%

                                     = $560,000

2.

If the variable expenses per stove increase as a percentage of the selling price, (Fixed expenses remain unchanged)

Then the Break-even in Dollar Sales remains same but the Break-even in Units will decrease because with the Increased selling price the company can attain Break-even by selling lesser quantity of units as compared to earlier

Let assume that there is 10% increase in both Selling price and Variable expenses (Fixed expenses are same)

Revised Selling Price = $140 * 110% = $154 per unit

Revised Variable Expenses = $98 * 110% = $107.8 per unit

Revised Contribution Margin per unit

= Revised Selling price per unit - Revised Variable expenses per unit = $154 - $107.8 = $46.2 per unit

Contribution Margin ratio = Contribution Margin per unit / Selling price per unit = $46.2 / $154 = 30%

Fixed cost = $168,000

Break-even (Units) = Total Fixed cost / Contribution Margin per unit

                                   = $168,000 / $46.2

                                   = 3,636.36

                                   = 3,637 stoves

Break-even (Dollars) = Total Fixed cost / Contribution Margin ratio

                                     = $168,000 / 30%

                                     = $560,000

3.

Proposed Scenario

Revised Selling Price = $140 * 90% = $126 per unit

Revised Sales (Units) = 13,000 * 125% = 16,250 stoves

4.

Stoves to be sold under Proposed Scenario to attain target profit of $70,000

Proposed Scenario

Revised Selling Price = $140 * 90% = $126 per unit

Variable Expenses = $98 per unit

Contribution Margin per unit = Selling price per unit - Variable expenses per unit = $126 - $98 = $28 per unit

= [(Total Fixed Cost + Target Profit) / Contribution Margin per unit]

= [($168,000 + $70,000) / $28]

= $238,000 / $28

= 8,500 stoves