Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $110 per unit. Variable expenses are $77 per stove, and fixed expenses associated with the stove total $161,700 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 19.000 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 $72,000 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 < Required 1 Required 2 >

Answer 1

Answer to Requirement 1.

Unit Selling Price = $110
Unit Variable Expense = $77
Unit Contribution Margin = Unit Selling Price - Unit Variable Expense
Unit Contribution Margin = $110 - $77
Unit Contribution Margin = $33

Break Even Sales (in Units) = Fixed Expense / Unit Contribution Margin
Break Even Sales (in Units) = $161,700 / $33
Break Even Sales (in Units) = 4,900 Units

Break Even Sales (in Dollar) = Break Even Sales (in Units) * Unit Selling Price
Break Even Sales (in Dollar) = 4,900 * $110
Break Even Sales (in Dollar) = $539,000

Answer to Requirement 2.

Higher Break Even Point

Increase in Variable Expenses per stove as percentage of selling price will decrease Contribution Margin per Stove. Decrease in Contribution Margin per stove will result in lower Contribution Margin ratio. The decrease in Contribution Margin will result in Higher Break Even point.

Answer to Requirement 3.

Current Unit Selling price = $110
Proposed Unit Selling Price = $110 – ($110 * 10%) = $99

Current Units sold = 19,000 Stoves
Proposed Unit Sold = 19,000 + (19,000 * 25%) = 23,750 stoves

Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income Outback Outfitters Present 19,000 Stoves Total Per Unit 2,090,000 100.00 1,463,000 70.00 627,000 30.00 161,700 465,300 Proposed 23,750 Stoves Total Per Unit 2,351,250 100.00 1,828,750 77.78 522,500 22.22 161,700 360,800

Answer to Requirement 4.

Proposed Unit Contribution Margin = $99 - $77
Proposed Unit Contribution Margin = $22

Desired Unit Sales = (Fixed Cost + Target Profit) / Unit Contribution Margin
Desired Unit Sales = ($161,700 + $72,000) / $22
Desired Unit Sales = 10,623 Stoves