Outback Outfitters sells recreational equipment. One of the company?s products,

Question

Outback Outfitters sells recreational equipment. One of the company?s products, a small camp stove, sells for $90 per unit. Variable expenses are $63 per stove, and fixed expenses associated with the stove total $129,600 per month. Required: 1. Compute the company?s 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.) Higher break-even point Lower break-even point 3. At present, the company is selling 16,000 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 yield a minimum net operating income of $73,000 per month? (Round up your answer to the nearest whole number.) Number of stoves to be sold

Explanation / Answer

Solution 1:

Selling price = $90 per unit

variable expense = $63 per unit

Contribution margin per unit = $90- $63 = $27

Break even point in unit sales = Fixed costs / Contribution Margin per unit = $129600 / $27 = 4800 stoves

Break even point in Dollar sales = 4800 * $90 = $432,000

Solution 2:

If variable Expenses increase per stove increases then contribution margin will reduce per stove. As a result, there will be a higher Break even point.

Solution 3:

Solution 4:

New contribution margin = $18 Per stove

Let "X" number of stoves to be sold at new selling price to yield $73,000 operating Income.

Net Operating Income = Number of Stoves *New contribution Magin - Fixed costs

$73000 = X*$18 - $129600

X = $202600 / $18 = 11,256 stoves

Hence,  number of stoves to be sold = 11256 stoves

OutBack Outfitters Present Proposed 16000 Stoves 20000 Stoves Total Per unit Total Per unit Sales Revenue $1,440,000.00 $90.00 $1,620,000.00 $81.00 Less: variable Cost $1,008,000.00 $63.00 $1,260,000.00 $63.00 Contribtion Margin $432,000.00 $27.00 $360,000.00 $18.00 less: Fixed costs $129,600.00 $129,600.00 Net Operating Income $302,400.00 $230,400.00

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