Exercise 5-17 Break-Even and Target Profit Analysis [LO5-4, LO5-5, LO5-6] Outbac

Question

Exercise 5-17 Break-Even and Target Profit Analysis [LO5-4, LO5-5, LO5-6] Outback Outfitters sells recreational equipment. One of the company's products, a small camp stove, sells for $50 per unit. Variable expenses are $32 per stove, and fixed expenses associated with the stove total $108,000 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 8,000 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 attain a target profit of $35,000 per month?

Explanation / Answer

Requirement 2:

If Variable expense increases as a percentage of sales, then contribution also increases accordingly.

Breakeven Point = Fixed Cost / Contribution Margin

Given, fixed cost remains unchanged.

Fixed Cost remaining cost with the increase in denominator makes the value reduced.

This implies, Breakeven point gets reduced

Correct Option is Lower Breakeven Point

Requirement 3:

Requirement 4:

Number of stoves to be sold to attain the profit of $35000

= (Fixed Expenses + Profit) / Contribution Margin per unit

= (108000+35000) / 13

= 143000 / 13

= 11000

Requirement 1 A Fixed Expenses 108000 B Selling Price 50 C Variable Expenses 32 D Contribution Margin (B-C) 18 E Breakeven Point in unit sales (A/D) 6000 F Breakeven Point in dollar sales (E*B) 300000

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