Reveen Products sells camping equipment. One of the company\'s products a lanter
ID: 2484693 • Letter: R
Question
Reveen Products sells camping equipment. One of the company's products a lantern sells for $100 per unit. Variable expenses are $60 per lantern, and fixed expenses associated with the lantern total $120,000 per month.
1. compute the company's break even point in number of lanterns and 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 lower break even point? Why?
3. At present the company is selling 60,000 lanterns per month. The manager is convinced that a 10% reduction in selling price will result in a 25% increase in the number of lanterns sold each month. Prepare 2 contribution statements.
4. Refer to the date in #3 above . How many lanterns would have to be sold at the new selling price to yield a minimum net operating income of $60,000 per month?
Explanation / Answer
1. Compute the company's break even point in number of lanterns and total sales dollars
Contribution Margin= Sales - Variable Expenses
= $100 - $60
= $40
Break even point in number of lanterns = Fixed Cost / Contribution Margin per Unit
= $120,000 / $40
= 3,000 units
Break even poit in dollars = Sales Price per unit * Break even Point in Units
= $100 * 3,000 = $300,000
2. If the variable expenses per lantern increase as a percentage of the selling price will it result in a higher or lower break even point? Why?
An increase in variable expenses per lantern as a percentage of the selling price will result in a higher break even point because higher variable expenses, will result in decrease in contribution margin as a percentage of sales. With lower contribution margin, more lanterns would have to be sold to generate enough contribution to cover the fixed costs.
3. At present the company is selling 60,000 lanterns per month. The manager is convinced that a 10% reduction in selling price will result in a 25% increase in the number of lanterns sold each month. Prepare 2 contribution statements.
Contribution Statements
Present Prorposed
60,000 units 75,000 units
Total $ Per Unit $ Total $ Per Unit $
Sales 6,000,000 100 6,750,000 90
Variable Expenses 3,600,000 60 4,500,000 60
Contribution Margin 2,400,000 40 2,250,000 30
Fixed Costs 120,000 120,000
Net Income 2,280,000 2,130,000
4. Refer to the date in #3 above . How many lanterns would have to be sold at the new selling price to yield a minimum net operating income of $60,000 per month?
Total $ Per Unit $
Sales(6,000 units) 540,000 90
Variable Expenses 360,000 60
Contribution margin 180,000 30
Fixed Cost 120,000
Net Income 60,000
Units to be sold to yield a minimum net operating income $60,000 pm = Total Contribution / Contribution Margin pu
= $180,000 / $30 = 6,000 units
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