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Check B Outback Outfitters sells recreational equipment. One of the companys products, a small camp stove, sells for $50 per
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Answer #1

1.

Profit

= Unit CM × Q − Fixed expenses

$0

= ($50 − $32) × Q − $108,000

$0

= ($18) × Q − $108,000

$18Q

= $108,000

Q

= $108,000 ÷ $18

Q

= 6,000 stoves, or at $50 per stove, $300,000 in sales

Alternative solution:

Unit sales to break even Fixed expenses Unit contribution margin $108,000 = 6,000 stoves $18.00 per stove or at $50 per stove

2.

An increase in variable expenses as a percentage of the selling price would result in a higher break-even point. If variable expenses increase as a percentage of sales, then the contribution margin will decrease as a percentage of sales. With a lower CM ratio, more stoves would have to be sold to generate enough contribution margin to cover the fixed costs.

3.

Present:
8,000 Stoves

Proposed:
10,000 Stoves*

Total

Per Unit

Total

Per Unit

Sales

$400,000

$50

$450,000

$45

**

Variable expenses

256,000

32

320,000

32

Contribution margin

144,000

$18

130,000

$13

Fixed expenses

108,000

108,000

Net operating income

$36,000

$ 22,000

*8,000 stoves × 1.25 = 10,000 stoves

**$50 × 0.9 = $45

As shown above, a 25% increase in volume is not enough to offset a 10% reduction in the selling price; thus, net operating income decreases.

4.

Profit

= Unit CM × Q − Fixed expenses

$35,000

= ($45 − $32) × Q − $108,000

$35,000

= ($13) × Q − $108,000

$13 × Q

= $143,000

Q

= $143,000 ÷ $13

Q

= 11,000 stoves

Alternative solution:

Unit sales to attain target profit Target profit + Fixed expenses Unit contribution margin $35,000 + $108,000 $13 = 11,000 st

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