Question

Check Outback Outfitters sells recreational equipment One of the company's products, a small camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses associated with the stove total $108,000 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 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 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 (3) above. How many stoves would have to be sold at the new selling price to attain a target profit of $35,000 per month? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 What is the break-even point in unit sales and in dollar sales? Break-even point in unit sales

Answer 1

1)	Breakeven point = Fixed expenses/ Contribution margin per unit
	Contribution margin per unit = Selling price - variable cost
	= $50-$32
	= $18 per unit
	Breakeven point in units = $108000/$18
	= 6000 units.
	Breakeven point in Dollars = 6000 units * $50 per unit
	= $300000
2)	If the variable costs increase as a percentage of selling price, contribution per unit
	margin decreases and this will increase the Brekeven point.
3)	Income statement - Present
	Sales (8000*$50)	$400000
	Less:Variable costs (8000*$32)	$256000
	Conribution Margin	$144000
	Less: Fixed Costs	$108000
	Operating Profit	$36000
	Proposed changes:
	Sales units = 8000 * 125% = 10000 units
	Selling price = $50*90% = $45
	Income statement - proposed changes
	Sales (10000*$45)	$450000
	Less:Variable costs (10000*$32)	$320000
	Conribution Margin	$130000
	Less: Fixed Costs	$108000
	Operating Profit	$22000
4)	Number of units to be sold = (Fixed costs+Target profit)/Contribution margin per unit
	Number of units to be sold@ present rate = ($108000+$35000)/$18
	= 7945 units
	Number of units to be sold@ proposed rate = ($108000+$35000)/$13
	= 11000 units