Question

Bam Corporation sells camping equipment. One of the company’s products, a lantern, sells for $100 per unit. Variable expenses are $70 per lantern, and fixed expenses associated with the lantern total $180,000 per month.

Required:

1. Compute the company’s break-even point in the number of lanterns.
2. Compute the number of lanterns to be sold to yield a net income of $72,000 per month. The tax rate for Bam is 30 percent.
3. At present, the company is selling 10,000 lanterns per month. The sales manager is convinced that a 10% reduction in the selling price will result in a 25% increase in the number of lanterns sold each month. Should the change in selling price be made? Show computations.

Answer 1

Break-even Point is the sales volume at which revenue equals cost (i.e. no profit no losss).

(a) Computation of Break-even point -

BEP (units) = Fixed Expenses / (Sales price per unit - variable expense per unit)

= 180000 / (100-70)

= 180000 / 30

= 6000 units

(b) Computation of Numbers of lanterns sold for Net income of $72000 per month -

In that case Number of units sold to achieved desired income = (Desired income/(1-tax rate) + Fixed Expenses)/(Selling price per unit - variable expenses per unit)

= (72000/(1-0.30)+180000) / (100-70)

= (102857.1 + 180000)/30

= 282857.1/30

= 9428.57 or 9429 units

(c) Computation of Net Income after some modification -

		Existing	Proposed
	Number of units sold for proposed (Existing*1.25)	10000	12500
	Sales value per unit for proposed (Existing*0.90)	100	90
less	variable cost per unit	70	70
	Contribution margin per unit (Sales value per unit - variable expense per unit)	30	20
	Total contribution margin (contribution margin per unit*Number of units sold)	300000	250000
less	fixed Cost	180000	180000
	Net profit (Total contribution margin - fixed cost)	120000	70000

Conclusion - No, change in selling price should not be made as Net profit will reduce in that case.

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