Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $130 per unit. Variable expenses are $91 per stove, and fixed expenses associated with the stove total $179,400 per month Required: 1. Compute the company's break-even point in unit sales and in dollar sales. Break-Even Point Number of stoves Total sales dollars 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 17,000 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. Outback Outfitters Present 17,000 Stoves Total Per unit Proposed Stoves Total Per unit 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 $78,000 per month? (Round up your answer to the nearest whole number.) Number of stoves to be sold

Answer 1

1.

Selling price per unit = $130

Variable cost per unit = $91

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 130-91

= $39

Contribution margin ratio = Contribution margin per unit / Selling price pr unit

= 39/130

= 30%

Break even point (in units) = Fixed costs / Contribution margin per unit

= 179,400/39

= 4,600 units

Break even point (in $) = Fixed costs / Contribution margin ratio

= 179,400/30%

= $598,000

	Break-Even Point
Number of stoves	4,600
Total sales dollars	$598,000

2.

When variable expense per stoves increase as a percentage of the selling price, it will result in higher break even point since due to increase in variable expenses, lower contribution margin per unit will be available, leading to higher break even point.

3.

Reduction in selling price per unit = 10%

= 130 x 10%

= $13

Proposed selling price per unit = 130-13

= $117

Increase in sales units = 25%

= 17,000 x 25%

= 4,250 units

Proposed sales units = 17,000+4,250

= 21,250 units

Outback Outfitters
	Present		Proposed
	17,000	Stoves	21,250	Stoves
	Total	Per unit	Total	Per unit
Sales	2,210,000	130	2,486,250	117
Variable cost	-1,547,000	91	-1,933,750	91
Contribution margin	$663,000	39	$552,500	26
Fixed cost	-179,400		-179,400
Operating Income	$483,600		$373,100

4.

Number of stoves to be sold for target income = ( Fixed costs+ target income)/Contribution margin per unit

= (!79,400+78,000)/26

= 257,400/26

= 9,900 units

Kindly comment if you need further assistance.

Thanks‼!