Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $100 per unit. Variable expenses are $70 per stove, and fixed expenses associated with the stove total $132,000 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 $76,000 per month?

Answer 1

Answer to Requirement 1.

Unit Contribution Margin = Unit Selling Price - Unit Variable Expense
Unit Contribution Margin = $100 - $70
Unit Contribution Margin = $30

Break Even Point (Unit Sales) = Fixed Cost / Unit Contribution Margin
Break Even Point (Unit Sales) = $132,000 / $30
Break Even Point (Unit Sales) = 4,400 Units

Break Even Point (Dollar Sales) = Break Even Point (Unit Sales) * Unit Selling Price
Break Even Point (Dollar Sales) = 4,400 * $100
Break Even Point (Dollar Sales) = $440,000

Answer to Requirement 2.

An increase in Variable Expense per stove will decrease Unit Contribution Margin which would result in higher break-even point.

Answer to Requirement 3.

Current Situation:

Sales = 11,000 * $100 = $1,100,000
Variable Expense = 11,000 * $70 = $770,000

Proposed Situation:

Proposed Unit Selling Price = $100 - ($100 * 10%) = $90
Proposed Unit Sold = 11,000 + (11,000 * 25%) =13,750 Units
Sales = 13,750 * $90 = $1,237,500
Variable Expense = 13,750 * $70 = $962,500

Answer to Requirement 4.

Proposed Unit Selling Price = $100 - ($100 * 10%) = $90
Proposed Unit Contribution Margin = $90 - $70 = $20

Required Unit Sales = (Fixed Cost + Target Profit) / Unit Contribution Margin
Required Unit Sales = ($132,000 + $76,000) / $20
Required Unit Sales = 10,400 stoves