Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, is sold for €50 per unit. Variable expenses are €32 per stove, and fixed expenses associated with the stove totals €108,000 per month. Required: 1. Compute the break-even point in unit sales and in Euro sales. 2. If the variable expenses per stove increase as a percentage of the selling price, will this then result in a higher or a lower break-even point? Why (assume that the fixed expenses remain unchanged)? 3. At present, the company is selling 8,000 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 income statements; 1. one under present operating conditions, and 2. one, as operations would appear after the proposed changes. Show both total and per unit data on your statements. 4. Referring to the data in (3) above: How many stoves would have to be sold at the new selling price to yield a minimum net operating income of €35,000 per month?

Answer 1

Contribution Margin per unit = Selling price per unit – Variable costs per unit

= Euro 50 – Euro 32

= Euro 18

Contribution Margin Ratio = Contribution Margin/Sales

= 18/50

= 36%

1.Break even point in unit sales = Fixed costs/Contribution margin per unit

= 108000/18

= 6000 stoves

Euro Sales = Fixed costs/CM Ratio

= 108000/36%

= $300,000

2.This will result in a higher break even point as contribution margin per unit will decrease with an increase in variable cost and more stoves will be required to be sold to recover fixed costs

3.

Income Statement
	Present		Proposed
	Total	Per unit	Total	Per unit
Sales Revenue	400,000	50	450,000	45
Less: Variable costs	256,000	32	320,000	32
Contribution Margin	144,000	18	130,000	13
Less: Fixed costs	108,000	13.5	108,000	10.8
Net Operating Income	36,000	4.5	22,000	2.2

4.Number of stoves required to be sold = (35000+108000)/(45-32)

= 11,000 stoves