Question

Exercise 3-17 Break-Even and Target Profit Analysis [LO3-4, LO3-5, LO3-6] 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 $161,700 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 9,000 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 9,000 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 $74.000 per month? (Round your answer to the nearest whole number.) Number of stoves to be sold

Answer 1

		Break-even point
1	Number of stoves	4,900
	Total sales dollars	$           5,39,000
2	Lower - break even point
3		Present		Proposed
		9000	Stoves	11250	Stoves
	Sales	$           9,90,000	$             110	$                11,13,750	$     99
	Variable cost	$           6,93,000	$               77	$                  8,66,250	$     77
	Contribution margin	$           2,97,000		$                  2,47,500
	Fixed cost	$           1,61,700		$                  1,61,700
	Net Income	$           1,35,300		$                      85,800
4	Number of stoves to be sold	10,714
1	Workings:
(i)	Unit selling Price	=	$             110
Less:	Unit variable cost	=	$               77
(ii)	Unit contribution margin	=	$               33
(ii) / (i)	Contribution margin ratio	=	30%
	Break-even point in units	=	Fixed costs / Unit contribution margin
		=	$161700 / $33
		=	4,900	units
	Break-even point in dollars	=	Fixed costs /Contribution margin ratio
		=	$161700 / 30%
		=	$   5,39,000
3	New Units of Stoves =	9000 X 1.25	=	$                      11,250
	New Selling Price =	$110 X 0.90	=	$                              99
4	Target Profit =	$               74,000
	Contribution per unit =	$247500/11250 units
		$                       22
	Number of stoves to be sold	(Fixed cost + Target profit) / Contribution per unit
		($161700 + $74000) / $22
		10,714	units