Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $140 per unit. Variable expenses are $98 per stove, and fixed expenses associated with the stove total $205,800 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 $79,000 per month? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 What is the break-even point in unit sales and in dollar sales? Break-even point in unit sales Break-even point in dollar sales

Answer 1

Solution 1:

Break even point in unit sales = Fixed cost/ Contribution magrin per unit

= $205800 / (140-98) = 4900 units

In dollar sales = 4900*$140 = $686,000

Solution 2:

Higher break even point.

Solution 3:

Outback Outfitters
Contribution Income statement	Present		Proposed
	18000	stoves	22500	stoves
	Total	Per unit	Total	Per unit
Sales	$25,20,000	$140	$28,35,000	$126
variable expense	$17,64,000	$98	$22,05,000	$98
Contribution Margin	$7,56,000	$42	$6,30,000	$28
Fixed Expense	$2,05,800		$2,05,800
Net Operating Income	$5,50,200		$4,24,200

Solution 4:

Unit sales = ($79000 +$205800) / $28 = 10,172