Outback Outfitters sells recreational equipment. One of the company’s products,
ID: 2548006 • Letter: O
Question
Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $120 per unit. Variable expenses are $84 per stove, and fixed expenses associated with the stove total $169,200 per month.
Compute the company’s break-even point in unit sales and in dollar sales
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.)
Lower break-even point
At present, the company is selling 11,000 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.
Refer to the data in (3) above. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $75,000 per month? (Round your answer to the nearest whole number.)
Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $120 per unit. Variable expenses are $84 per stove, and fixed expenses associated with the stove total $169,200 per month.
Explanation / Answer
Answer
Sales price per unit
$120
(-) Variable cost per unit
$84
Contribution margin per unit
$36
A
Fixed cost
$169200
B
Contribution margin per unit
$36
C=A/B
Break Even point in number of stoves
4700
D
Sales price per unit
$120
E=C x D
Break Even point in total sales dollars
$564000
If the variable expenses per stove increase as a percentage of the selling price, it will result in Higher Break Even point BECAUSE, increase in variable cost will lead to lower contribution margin (denominator for calculating BEP).
Outback Outfitters
Present
Proposed
11,000
Stoves
[11000 + 25%] 13750
Stoves
Total
Per unit
Total
Per unit
Sales revenue
$1320000
$120
$1485000
[$120 – 10%] $108
(-) Variable cost
$924000
$84
$1155000
$84
Contribution margin
$396000
$36
$330000
$24
(-) Fixed cost
$169200
$169200
Net Income
$226800
$160800
A
New targeted operating income
$75000
B
Fixed Cost
$169200
C=A+B
Total contribution margin required
$244200
D
New contribution margin per unit
$24
E=C/D
Number of stoves to be sold
10175
Sales price per unit
$120
(-) Variable cost per unit
$84
Contribution margin per unit
$36
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