Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $100 per unit. Variable expenses are $70 per stove, and fixed expenses associated with the stove total $141,000 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 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.

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 $76,000 per month?

Answer 1

Solution:

The following information is given for camp stove for a month

• The selling price per unit is $100 pu
• the variable cost per unit is $70pu
• The fixed costs is $141,000 per month

Contribution margin per unit = Sales price per unit - variable cost per unit
=$100 - $70
=$30

Breakeven point in units = Fixed cost/contribution margin per unit
= 141,000 /30
= 4700 unit

Breakeven in dollars = Breakeven point in units x sales price per unit
=4700*100
= $470,000

b) The break-even point is calculated by the contribution margin percentage so any corresponding increase or decrease of variable cost in relation to the sale price  will not change the contribution margin ratio or percentage, and hence will  not impact the break-even point units or dollars terms.

C) The information as per present operating conditions

• the company is selling 11,000 stoves per month
• The selling price per unit is $100
• the variable cost per unit is $70
• The fixed costs is $141,000 per month

The contribution format income statements under present operating conditions

Outback Outfitters
Contribution margin income statement
For the month ended
	Amount
Revenues	$1100000
Less - Variable cost	$770000
Contribution margin	$330000
less - Fixed cost	$141000
operating profit	$189000

The revised operating conditions are

• the revised selling price is $90 ($100 x 90%)
• the revised sales volume is 13,750 units (11,000 units x 125%)

The contribution format income statements after the proposed changes

Outback Outfitters
Contribution margin income statement
For the month ended
	Amount
Revenues	$1237500
Less - Variable cost	$962500
Contribution margin	$275000
less - Fixed cost	$141000
operating profit	$134000

d)

• The fixed costs is $141,000 per month
• The target net operating income of $76,000 per month
• the revised selling price is $90
• the variable cost is $70

Contribution margin per unit = Sales price per unit - variable cost per unit
=$90- 70
=$20

Number of units to be sold = (fixed cost + target net income) / Contribution margin per unit
= ($141,000 + $76,000)/20
=10850 units