Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $150 per unit. Variable expenses are $105 per stove, and fixed expenses associated with the stove total $220,500 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 18,000 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 $75,000 per month? Complete this question by entering your answers in the tabs below.

Answer 1

Answers

• All working forms part of the answer
• * requirement 1

A	Sale price	$150
B	Variable cost	$105
C = A - B	Contribution margin per unit	$45
D	Fixed cost	$220,500
E = D/C	Break Even point in units	4900	Answer
F = E x A	Break even point in dollar sales	$735,000	Answer

• Requirement 2

HIGHER Break even point.
Because increase in variable cost % = decrease in CM ratio % = Higher Break even point.

• Requirement 3

	Present		Proposed
	18000	stoves	22500	stoves
	Total	per unit	Total	per unit
Sales	$2,700,000	$150	$3,037,500	$135
Variable cost	$1,890,000	$105	$2,362,500	$105
Contribution margin	$540,000	$45	$450,000	$30
Fixed Cost	$220,500		$220,500
Net Income	$319,500		$229,500

• Requirement 4

A	Target Profit	$75,000
B	Fixed cost	$220,500
C = A+B	Total contribution margin required	$295,500
D	Contribution margin per unit	$30
E = C/D	Units sales needed to attain target profits	9,850	Answer