Question

1. 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.

2. Refer to the data in scenario 1. How many stoves would have to be sold at the new selling price to attain a target profit of $77,000 per month?

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.

Outback Outfitters
Contribution Income Statement	Present		Proposed
	12,000	Stoves		Stoves
	Total	Per unit	Total	Per unit
	0	$0	0	$0
	$0		$0

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $140 per unit. Variable expenses are $98 per stove, and fixed expenses associated with the stove total $168,000 per month.

Answer 1

Solution 1:

Outback Outfitters
Contribution Income Statement
Particulars	Present - 12000 Stoves		Proposed - 15000 Stoves
	Total	Per unit	Total	Per unit
Sales	$1,680,000.00	$140.00	$1,890,000.00	$126.00
Variable Expenses	$1,176,000.00	$98.00	$1,470,000.00	$98.00
Contribution	$504,000.00	$42.00	$420,000.00	$28.00
Fixed Expenses	$168,000.00		$168,000.00
Net Income	$336,000.00		$252,000.00

Solution 2:

Target profit at new selling price = $77,000

Target contribution = Target Profit + Fixed Expenses = $77,000 + $168,000 = $245,000

Contribution per unit = $28

Nos of stoves to be sold to attain profit of $77,000 = Target Contribution / Contribution per unit = $245,000 / $28 = 8750 stoves.