Question

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Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $120 per unit. Variable expenses are $84 per stove, and fixed expenses associated with the stove total $180,000 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 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. ata in Required 3. How many stoves would have to be sold at the new selling price to attain a target profit of $77000 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 Required 2 >

Answer 1

1
Break-even point in unit sales	Fixed costs/Contribution margin per unit
Break-even point in unit sales	180,000/(120-84)
Break-even point in unit sales	5,000
Contribution margin ratio	Contribution margin per unit/Sales price per unit
Contribution margin ratio	(120-84)/120
Contribution margin ratio	30.00%
Break-even point in dollar sales	Fixed costs/Contribution margin ratio
Break-even point in dollar sales	180000/30%
Break-even point in dollar sales	$600,000
2
If variable expense increases then contribution margin would decrease and thus it would require higher break-even point
3
Calculation of contribution margin income statement
Outback Outfitters
	Present		Proposed
	17000	stoves	21250	stoves	17000*1.25
	Total	Per unit	Total	Per unit
Sales revenue	$2,040,000	$120	$2,295,000	$108	(120*90%)
Less: Variable expenses	$1,428,000	$84	$1,785,000	$84
Contribution margin	$612,000	$36	$510,000	$24
Less: Fixed expenses	$180,000		$180,000
Net operating income	$432,000		$330,000
4
Calculation of number of stoves to be sold
No of stoves to be sold	(Fixed expense+Required operating income)/Contribution margin per unit
No of stoves to be sold	(180000+77000)/(108-84)
No of stoves to be sold	257000/24
No of stoves to be sold	10,708