Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses associated with the stove total $108,000 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 feed expenses remain unchanged) 3. At present, the company is selling 8,000 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 attain a target profit of $35,000 per month?

Answer 1

1. Contribution per unit = Selling price per unit - Variable cost per unit

= 50-32

=$18

Breakeven point( units) = Fixed cost

Contribution per unit

= $108,000/18

= 6000 units

Breakeven point( sales) = Breakeven point(units) * Selling price per unit

= 6000 * 50

= $300,000

2. If the variable expense per stove increases as a percentage of selling price, It will result in lower break-even point.

Let us take a numerical example.

Assume Selling price increases by 10% from $50 to $55. Initially variable cost is 32/50*100 = 64 % of selling price, now variable cost increases to $55*64% , that is $35.20 per unit.

Contribution per unit= 55- 35.20 = $19.80

Breakeven point( units) = Fixed cost

Contribution per unit

= $108,000/19.80

= 5454 units

Thus breakeven point reduces from 6000 units to 5454 units.

3. New Selling price = 50*(100-10)% = $45

New sales units = 8000 *(100+25)% = 10,000 units

Income Statement
Selling price per unit	$50	$45
Less: Variable expenses	($32)	($32)
Contribution per unit	$18	$13
No. of units	8,000	10,000
Total Contribution	$144,000	$130,000
Less: Fixed cost	($108,000)	($108,000)
Net Income	$36,000	$22,000

The proposed changes will lead to decrease in net income by $36,000- $22,000 = $14000. Hence existing selling price of $50 per unit is more profitable.

4. Contribution at new Selling price = $13 per unit

No. of units to be sold to achieve desired profit of $35,000

= Fixed cost+Desired profit

Contribution per unit

= $108,000+$35,000

13

= 11,000 units

Thus to achieve desired profit of $35,000 ,11,000 units to be sold at $ 45 per unit.