Question 2 : Reveen Products sells camping equipment. One of the company\'s prod

Question

Question 2 : Reveen Products sells camping equipment. One of the company's products, a camping lantern, sells for $90 per unit. Variable expenses are $63 per lantern, and fixed expenses associated with the lantern total $135,000 per month. Required: 1. Compute the company's break - even point in number of lanterns and in total sales dollars. 2. 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.) 3. At present,the company is selling 8000 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 lantern 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. 4 Refer to the data in (3) 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

Ans 1 Break even Point units Fixed Cost/Sales price -Variable Cost 135000/90-63 5000 Break even Point in dollars Fixed Cost/PV ratio                                            4,50,000.00 Ans 2 Increase in the Variable cost as a % of sales price will increase the BEP since the revised contribution would be less, causing higher no of units required to Break even. Ans 3 Present condition Revised Condition Contribution Per Unit =SP -VC 27 18 No of Units Sold 8000 10000 Contribution                                            2,16,000.00                         1,80,000.00 Less Fixed Cost                                            1,35,000.00                         1,35,000.00 Net Operating income                                               81,000.00                             45,000.00 Ans 4 Min Units to be sold to earn desired profit Fixed Expense+ Desired Profit/Contribution per Unit 135000+72000/18                                               11,500.00

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