Question

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 $151,200 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 14,000 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 Required 3. How many stoves would have to be sold at the new selling price to attain a target profit of $75,000 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 1 Required 2 >

Answer 1

1.

Break-even point in unit sales	4200
Break-even point in dollar sales	504000

Break-even point in unit sales = Total fixed expenses / Contribution per unit = $151200 / ($120 - $84) = $151200/$36 = 4200 units

Break-even point in dollar sales = Total fixed expenses / Contribution margin ratio = $151200/30% = $504000

Contribution margin ratio = Contribution / Sales = ($120 - $84)/$120 = $36/$120 = 30%

OR

Break-even point in dollar sales = 4200 units x $120 = $504000

2. Higher break-even point

If the variable expenses as a percentage of selling price increase, it will lead to a reduction in the contribution margin and hence will result in a higher break-even point.

3.

Outback Outfitters
Contribution Income Statement	Present		Proposed
	14000	Stoves	17500	Stoves
	Total	Per unit	Total	Per unit
Sales	1680000	120	1890000	108
Variable costs	1176000	84	1470000	84
Contribution margin	504000	36	420000	24
Fixed costs	151200		151200
Net operating income $	352800		268800

Proposed units sold = 14000 x 1.25 = 17500 stoves

Proposed selling price per unit = $120 - (10% x $120) = $120 - $12 = $108

Note: The variable cost per unit and monthly fixed costs have been considered to remain the same under the proposed change.

4.

Unit sales needed to attain the target profit

9425

Unit sales for desired net operating income = (Fixed costs + Desired net operating income) / Contribution per unit = ($151200 + $75000)/$24 = $226200/$24 = 9425 stoves