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 $120 per unit. Variable expenses are $84 per stove, and fixed expenses associated with the stove total $169,200 per month. Required: 1. What is the 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.) 3. At present, the company is selling 18,000 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 Required 3. How many stoves would have to be sold at the new selling price to attain a target profit of $71,000 per month?

Explanation / Answer

Solution:

Part 1 --- Break Even Point in units and dollar sales

Break Even Point in Units Sales = Total Fixed Costs / Contribution Margin per unit

Contribution Margin Per Unit = Unit Selling Price $120 – Unit Variable Cost $84 = $36

Total Fixed Cost = $169,200

Break Even Point in Units Sales = Total Fixed Costs $169,200 / Contribution Margin per unit $36

= 4,700 Units

Break Even Point in dollar Sales = Total Fixed Costs / Contribution Margin Ratio

Contribution Margin Ratio = Contribution Margin Per Unit $36 / Unit selling Price 120 x 100 = 30%

Break Even Point in dollar Sales = Total Fixed Costs $169,200 / Contribution Margin Ratio 0.30 = $564,000

Part 2 – Higher Break Even Point

If the variable expenses per stove increase as a percentage of the selling price, it will 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 stoves would have to be sold to general enough contribution margin to cover the fixed costs.

Part 3 – Contribution Format Income Statement

Present Unit Selling Price = $120

Proposed Unit Selling Price = $120 – 120*10% Decrease = $108

Present sales in units = 18,000 Stoves

Proposed Unit Sales = 18,000 + 18,000*25% Increase = 22,500 Units

Contribution Margin Income Statement

Present

Proposed

$ Per Unit

Total

$ Per Unit

Total

Sales Revenue

$120

$2,160,000

(18,000*$120)

$108

$2,430,000

($108*22,500)

Less: Variable Expenses

$84

$1,512,000

(84*18,000)

$84

$1,890,000

(84*22500)

Contribution Margin

$36

$648,000

$24

$540,000

Less: Fixed Expenses

$169,200

$169,200

Operating Profit

$478,800

$370,800

Part 4 –

To attain a target profit $71,000, number of stoves to be sold at new selling price = (Total Fixed Expenses + Target Profit) / Contribution Margin Per Unit

= (169,200 + 71,000) / 24

= 10,008 Units

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Contribution Margin Income Statement

Present

Proposed

$ Per Unit

Total

$ Per Unit

Total

Sales Revenue

$120

$2,160,000

(18,000*$120)

$108

$2,430,000

($108*22,500)

Less: Variable Expenses

$84

$1,512,000

(84*18,000)

$84

$1,890,000

(84*22500)

Contribution Margin

$36

$648,000

$24

$540,000

Less: Fixed Expenses

$169,200

$169,200

Operating Profit

$478,800

$370,800

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