Question

Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $90 per unit. Variable expenses are $63 per stove, and fixed expenses associated with the stove total $116,100 per month. Required: 1. Compute the company's break-even point in unit sales and in dollar sales. Break-Even Point Number of stoves Total sales dollars 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.) Higher break-even point Lower break-even point 3. At present, the company is selling 18,000 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 Present 18,000 Stoves Total Per unit Proposed Stoves Total Per unit 4. Refer 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 $75,000 per month? (Round up your answer to the nearest whole number.) Number of stoves to be sold

Answer 1

Solution 1:

Break even point in units sales = Fixed cost/ Contribution margin per unit

= $116100 / (90-63) = 116100 / 27 = 4300 units

Break even point in Dollar sales = 4300*$90 = $387,000

Solution 2:

If variable expense increase then Contribution margin per unit will decrease. therefore it will result in a "Higher break even point".

Solution 3:

Outback Outfitters
Contribution Income statement	Present		Proposed
	18000	stoves	22500	stoves
	Total	Per unit	Total	Per unit
Sales	$16,20,000	$90	$18,22,500	$81
variable expense	$11,34,000	$63	$14,17,500	$63
Contribution Margin	$4,86,000	$27	$4,05,000	$18
Fixed Expense	$1,16,100		$1,16,100
Net Operating Income	$3,69,900		$2,88,900

Solution 4:

Number of stoves to be sold = ($116100+$75000) / ($81- $63)

= $191100 / $18

= 10,617