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 $191,100 per month. Required: 1. Compute the company's break-even point in unit sales and in dollar sales. Break-Even Point Number of stoves Total sales dollars 2. If the variable expenses per stove increase as a percentage of the selling price, will it result in a higher or a lower break-even point? (Assume that the fixed expenses remain unchanged.) O Higher break-even point O Lower break-even point 3. At present, the company is selling 16,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes. Outback Outfitters Present 16,000 Stoves Total Per unit Proposed Stoves Total Per unit 0$ 0 0 $

Answer 1

1
Break-even point in unit sales	Fixed costs/Contribution margin per unit
Break-even point in unit sales	191100/(130-91)
Break-even point in unit sales	4900
Contribution margin ratio	Contribution margin/Sales
Contribution margin ratio	(130-91)/130
Contribution margin ratio	30.00%
Break-even point in sales dollar	Fixed costs/Contribution margin ratio
Break-even point in sales dollar	191100/30%
Break-even point in sales dollar	$637,000
2.
If variable costs increases then contribution margin would decrease and thus company will have to sell more units to break-even
Thus, this would result in higher break-even point
3.
Outback Outfitters
	Present		Proposed
	16000	stoves	20000	stoves	(16000*1.25)
	Total	per unit
Sales revenue	$2,080,000	$130	$2,340,000	$117	130*90%
Less: Variable costs	$1,456,000	$91	$1,820,000	$91
Contribution margin	$624,000	$39	$520,000	$26
Less: Fixed costs	$191,100		$191,100
Operating income	$432,900		$328,900
4
No of units to be sold	(Fixed costs + Target operating income)/Contribution margin per unit
No of units to be sold	(191100+71000)/26
No of units to be sold	10,081