Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $110 per unit. Variable expenses are $77 per stove, and fixed expenses associated with the stove total $155,100 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 11,000 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 $80,000 per month?

Answer 1

1.

	$ Per Unit
Sale Price	110
Variable Cost	77
Contribution	33
	$
Fixed Cost	155100
Break even (Units)	4700
Break even (Sales)	517000

2.

	$ Per Unit
Sale Price	110
Variable Cost	77.77
Contribution	32.23
	$
Fixed Cost	155100
Break even (Units)	4812.287
Break even (Sales)	529351.5

Resulted in higher breakeven point

3.

			Increase in 25%
	$ Per Unit	11000 Units	$ Per Unit	13750
Sale Price	110	1210000	99	1361250
Variable Cost	77	847000	77	1058750
Contribution	33	363000	22	302500
	$
Fixed Cost	155100	155100		155100
Net Profit		207900		147400

4.

Target Profit	80,000
Fixed Cost	155100
	2,35,100
Contribution PU	22
Units to be sold	10686.3636
	10687 Units