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 fixed 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 fit of $35.000 per month

Answer 1

1. Break-Even point in Units = Fixed cost/Contribution per unit   

= $108000/ (50-32)

= $108000/ $18

= 6000 units per month

Break-Even point in sales = (Fixed Cost/ Contribution per unit)* Selling price

   = ($108000/ $18)*50

= $300000

2. If variable expenses per stove increase as a percentange of selling price, it will result in Higher Break-even point. As higher variable cost will decrease contribution per unit which will ultimately result in Higher break-even point Units.

3. Refer Attached Image.

4. Net Profit = Sales Revenue - Variable Cost - Fixed Cost

Let Number of units sold to get Targeted profit be X

Therefor,

$35000 = (X Units * 45) - ( X Units * 32) - $108000

After Solving above equation

X Units = 11000 Units

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