Fireside Products sells camping equipment. One of the company’s products, a camp

Question

Fireside Products sells camping equipment. One of the company’s products, a camping lantern, sells for $95 per unit. Variable expenses are $61 per lantern, and fixed expenses associated with the lantern total $135,000 per month.
Required:
a) Compute the company’s break-even point in number of lanterns and in total sales dollars.
b) If the variable expenses per lantern increase as a percentage of the selling price, will it result in a higher or a lower break-even point? Why? (Assume that the fixed expenses remain unchanged.)    

c) At present, the company is selling 8,000 lanterns per month. The sales manager is convinced that a 10% reduction in the selling price will result in a 25% increase in the number of lanterns sold each month. Prepare two contribution income statements, one under present operating conditions, and one as operations would appear after the proposed changes. Show both total and per unit data on your statements and determine if the proposed changes will be beneficial to the company’s net operating income.
d) Refer to the data in (c) above. How many lanterns would have to be sold at the new selling price to yield a minimum net operating income of $72,000 per month?

Explanation / Answer

a)break even quantity=3970.6

in dollars=377206

b)An increase in the variable expenses as a percentage of the selling price would result in a higher break-even point. The reason is that if variable expenses increase as a percentage of sales, then the contribution margin will decrease as a percentage of sales. A lower CM ratio would mean that more lanterns would have to be sold to generate enough contribution margin to cover the fixed costs

c)Current quantity: 8,000 lanterns 8,000 * 25% = 2,000

Proposed increase in sales (in units): 8,000 + 2,000 = 10,000

$95 (current selling price) - ($95*10% price reduction) = $85.5

sales                                     760000                   855000

variable expenses                488000                   610000

contribution margin              272000                   245000

fixed expenses                    135000                   135000

net operating income           137000                  110000

As shown above, a 25% increase in volume is not enough to offset a 10% reduction in the selling price; thus net operating income decreases

d)Sales = Variable expenses + Fixed Expenses + Profit

85.5q=61q+135000+72000

24.5q=207000

q=8449

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