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 $159,900 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 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 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. 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 Reed 1 Required 2 >

Answer 1

Break even point is the point at which revenue is equal to cost (i.e no profit no loss).

Requirement 1

BEP (in units) = Fixed Cost / (Selling price per unit - variable cost per unit)

Selling price per unit = 130

variable cost per unit = 91

fixed expense = 159900 per month

BEP (in units) = 159900/(130-91)

= 159900/39

= 4100 units

BEP in $ = BEP in units*selling price per unit

= 4100*130

= 533000

Requirement 2

If the variable expenses per stove increase as a percentage of selling price, it will results in a lower break even point.

for eg. selling price per unit increases by 10% so variable cost would also increases by 10%

means BEP = 159900/(130*1.10-91*1.10)

= 159900/(143 - 100.1)

= 159900/42.9

= 3727 units

Requirement 3

Increase in monthly sales of stove = 16000*1.25

= 20000 units

selling price per unit = 130*(1-0.10)

= 130*0.90

= 117

	Outback outfitters
	contribution income statement	Present		Proposed
		16000	stoves	20000	stoves
		Total	per unit	Total	per unit
	Sales present (16000*130), proposed (20000*117)	2080000	130	2340000	117
less	variable expenses	1456000	91	1820000	91
	contribution	624000	39	520000	26
less	fixed expenses	159900		159900
	Net operating income	464100		360100

Requirement 4

Target profit = 75000 per month

stove units sold to earn the above amount = (target profit + fixed cost)/(New selling price per unit - variable cost per unit)

= (75000+159900)/(117-91)

= 234900/26

= 9034.615

or 9035 units

Please check with your answer and let me know.