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 $176,400 per month.

Required:
1.	Compute the company’s break-even point in unit sales and in dollar sales.
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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.)

	Higher break-even point
	Lower break-even point

3.	At present, the company is selling 12,000 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.

Answer 1

1. Break-even Sales= $176,400/($120-$84) =4900 units

    Break even point($ sales)=$176,400/Contribution margin per unit

    Where contribution margin per unit=( ($120-$84)/$120)*100 = 30%

   Therefore Break even point($)= $176,400/30% =$588,000

2. If the Variable expense per stove as a increase in selling price,

   Break-even-point(in $) remains same since the contribution margin pe unit remains the same

   Break-even-point (in units) results in a lower break-even-point.

3. No the sales manager's point is not correct.