Question

Exercise 6-17 Break-Even and Target Profit Analysis [LO6-4, LO6-5, LO6-6]

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 $197,400 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 12,000 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.

Exercise 6-17 Break-Even and Target Profit Analysis [LO6-4, LO6-5, LO6-6]

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 $197,400 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 12,000 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.

וווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווווד ד ד ו ו ד ים Contribution Income Statement Proposed Outback Outfitters Present 12,000 Stoves Total Per unit Stoves Total Per unit 0 $ 0 0 0

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 $72,000 per month?

Answer 1

1.

Let us first calculate contribution per unit

Contribution per unit = Sale price per unit - Variable cost per unit = 140 - 98 = $ 42 per unit

Break even point in units = Fixed expenses / Contribution per unit = 197,400 / 42 = 4,700 units

Break even point in dollars = 4,700 X 140 = 658,000

2.

If the variable expenses per stove increases as a percentage of the selling price, it will result in HIGHER BREAK EVEN POINT. If variable expenses increase as a percentage of sales then contribution margin would decrease. If contribution margin would decrease the denominator in the equation will go down. This would mean that more sales would be required to cover up the fixed costs.

3.

Outback Outfitters
Contribution Income Statement	Present	Proposed
	12,000	Stoves	15,000	Stoves
	Total	Per unit	Total	Per unit
Sales	1,680,000	140	1,890,000	126
Variable expenses	1,176,000	98	1,470,000	98
Contribution margin	504,000	42	420,000	28
Fixed expenses	197,400		197,400
Net operating income	306,600		222,600

4.

Number of units = (Target profit + Fixed expenses) / Contribution = (72,000 + 197,400) / 28 = 9622 units