Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $100 per unit. Variable expenses are $70 per stove, and fixed expenses associated with the stove total $144,000 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 17,000 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 (3) above. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $79,000 per month? (Round your answer to the nearest whole number.)

Answer 1

1.
Contribution margin per unit = Selling price per unit - Variable cost per unit = 100 - 70	30
Contribution margin ratio = Contribution margin per unit / Selling price per unit = 30 / 100	30%

	Break-Even Point
Number of stoves = Total Fixed cost / Contribution margin per unit = 144000 / 30	4800
Total sales dollars = Total fixed costs / Contribution margin ratio = 144000 / 30%	480000

2.

If the variable expense per stove increases as a percentage of the selling price and the fixed costs remains unchanged then it will result in higher break-even point, because the contribution margin per unit will decrease which will lead to higher break-even point

3.
Proposed selling price = Present selling price * ( 1 - % reduction ) = 100 * ( 1 - 10% )	90
Proposed sales of stoves = Present sales of stoves * ( 1 + % increase ) = 17000 * ( 1 + 25% )	21250

Outback Outfitters
	Present		Proposed
	17000	Stoves	21250	Stoves
	Total	Per unit	Total	Per unit
Sales	1700000	100	1912500	90
Variable costs	1190000	70	1487500	70
Contribution margin	510000	30	425000	20
Fixed costs	144000		144000
Net operating income	366000		281000

4.
Number of stoves to be sold = ( Net operating income + Fixed costs ) / Contribution margin per unit = ( 79000 + 144000 ) / 20	11150