Question

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 $205,800 per month.

Required 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.

Answer 1

Contribution Format Income Statement
Under present operating conditions
	Sales revenue (15000*140)	$     2,100,000
Less:	Variable cost (15000*98)	$     1,470,000
	Contribution margin	$         630,000
Less:	Fixed cost	$         205,800
	Net income	$         424,200
Contribution Format Income Statement
Under proposed changes
	Sales revenue (18750*126)	$     2,362,500
Less:	Variable cost (18750*98)	$     1,837,500
	Contribution margin	$         525,000
Less:	Fixed cost	$         205,800
	Net income	$         319,200
Revised selling price (140-(140*10%))		$                 126
Revised quantity sold (15000+(15000*25%))		18,750

Answer 2

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