Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $110 per unit. Variable expenses are $77 per stove, and fixed expenses associated with the stove total $161,700 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 19,000 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 $72,000 per month? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 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 $72,000 per month? (Round up your final answer to the nearest unit.) Unit sales needed to attain the target profit

Answer 1

	Computation of Contribution margin per unit:-
	Sales price per unit			$110
Less:	Variable cost per unit			$77
	Contribution margin per unit			$33
	Fixed Costs per month			$161,700
1	Computation of Company's Break-even point in unit sales:-
	Break even point in units	=	Total Fixed Costs
			Contribution per unit
		=	$161,700
			$33
		=	4900
	Computation of Company's Break-even point in dollar sales :-
a	Break even point in units		4900
b	Selling Price Per unit		$                                110
c	Break-even point in dollar sales (a*b)		$                        539,000
2	If variable expenses per stove increase as a % of the selling price, will it result in higher or lower break even point?
	It will result in higher break even point because due to increase in variable expenses, contribution margin ratio get reduced and the it results into higher break even point.
3	Contribution Format Income Statements:-
	Proposed Production and sales = 19000 + 19000*25% = 23750 stoves
	Reduced Selling Price = 110 - 10% of 110 = $99 per stove
Outback Outfitters
Contribution Income Statement
			Present		Proposed
	Production Capacity (stoves)		19000	stoves	23750	stoves
			Per Unit	Total	Per Unit	Total
a	Sales		$                                110	$                  2,090,000	$                               99	$   2,351,250
b	Variable cost		$                                  77	$                  1,463,000	$                               77	$   1,828,750
c	Contribution margin (a-b)		$                                  33	$                     627,000	$                               22	$      522,500
d	Fixed costs			$                     161,700		$       161,700
e	Net Operating Income (c-d)			$                     465,300		$      360,800
4. Computation of No. of stoves to be sold at new selling price to attain a target profit of $72000 per month:-
Computation of Revised contribution margin :-
	Sales price per unit			$                               99
Less:	Variable cost per unit			$                               77
	Contribution margin per unit			$                               22
a	Fixed Expenses		$                        161,700
b	Target Profit		$                           72,000
c	Desired Contribution (a+b)		$                        233,700
d	Contribution margin per unit		$                                  22
	Unit sales needed to attain target profit (Sales Volume)	=	Desired Contribution
			Contribution per unit
		=	$233,700
			$22
		=	10623	stoves

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