Question

Check my Exercise 5-17 Break-Even and Target Profit Analysis [LO5-4, LO5-5, LO5-6] 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 $184,800 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 15,000 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 $75,000 per month? Complete this question by entering your answers in the tabs below.

Answer 1

Answers

• [1]

A	Sale price	$140
B	Variable Cost	$98
C = A - B	Unit contribution margin	$42
D	Fixed Cost	$184,800
E = D/C	Break even point in units	4400	Answer
F = E x A	Break even point in $	$616,000	Answer

• [2]
  Higher Break even point will arise, because higher variable cost % = lower CM ratio = higher break even point.
• [3]

	Present		Proposed
	15000	stoves	18750	stoves
	Total	per unit	Total	per unit
Sale	$2,100,000	$140	$2,362,500	$126
Variable cost	$1,470,000	$98	$1,837,500	$98
Contribution margin	$630,000	$42	$525,000	$28
Fixed cost	$184,800		$184,800
Net Income or net operating income	$445,200		$340,200

• [4]

A	New Sale price	$                  126.00
B	Variable cost	$                    98.00
C = A - B	New Contribution margin per unit	$                    28.00
D	Fixed Cost	$          184,800.00
E	Target Profits	$            75,000.00
F = D+E	Total Contribution margin required	$          259,800.00
G = F/C	No. of stoves to be sold to earn target Profits	9,279 ANSWER