Questions: Outback Outfitters sells a small camp stove for 100 per unit. Variable expenses are 70 per unit, and fixed expenses total 150,000 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 the fixed expenses remain unchanged.) 3. At present, the company is selling 16,000 stoves per month. The sales manager is convinced a 10% reduction in the selling price would result in a 25% increase in unit sales. 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 74,000 per month?

Solution Steps

To solve the given questions, we will follow these approaches:

1. Break-even Point Calculation:

   • Calculate the contribution margin per unit (selling price minus variable expenses).
   • Determine the break-even point in units by dividing total fixed expenses by the contribution margin per unit.
   • Calculate the break-even point in dollar sales by multiplying the break-even units by the selling price.

2. Effect of Increased Variable Expenses:

   • Understand that an increase in variable expenses reduces the contribution margin per unit, which increases the break-even point in units.

3. Contribution Format Income Statements:

   • Calculate the current contribution margin and net operating income.
   • Adjust the selling price and sales volume according to the proposed changes and calculate the new contribution margin and net operating income.

The contribution margin per unit is calculated as:

\[ \text{Contribution Margin per Unit} = \text{Selling Price} - \text{Variable Expenses} = 100 - 70 = 30 \]

The break-even point in units is:

\[ \text{Break-even Units} = \frac{\text{Fixed Expenses}}{\text{Contribution Margin per Unit}} = \frac{150000}{30} = 5000 \]

The break-even point in dollar sales is:

\[ \text{Break-even Dollar Sales} = \text{Break-even Units} \times \text{Selling Price} = 5000 \times 100 = 500000 \]

If the variable expenses increase, the contribution margin per unit decreases, leading to a higher break-even point in units. This is because:

\[ \text{New Contribution Margin per Unit} = \text{Selling Price} - \text{Increased Variable Expenses} \]

A decrease in the contribution margin results in:

\[ \text{Higher Break-even Units} = \frac{\text{Fixed Expenses}}{\text{New Contribution Margin per Unit}} \]

• Current Sales Revenue:

\[ \text{Current Sales Revenue} = 16000 \times 100 = 1600000 \]

• Current Variable Expenses:

\[ \text{Current Variable Expenses} = 16000 \times 70 = 1120000 \]

• Current Contribution Margin:

\[ \text{Current Contribution Margin} = 1600000 - 1120000 = 480000 \]

• Current Net Operating Income:

\[ \text{Current Net Operating Income} = 480000 - 150000 = 330000 \]

• New Selling Price:

\[ \text{New Selling Price} = 100 \times 0.9 = 90 \]

• New Sales Units:

\[ \text{New Sales Units} = 16000 \times 1.25 = 20000 \]

• New Sales Revenue:

\[ \text{New Sales Revenue} = 20000 \times 90 = 1800000 \]

• New Variable Expenses:

\[ \text{New Variable Expenses} = 20000 \times 70 = 1400000 \]

• New Contribution Margin:

\[ \text{New Contribution Margin} = 1800000 - 1400000 = 400000 \]

• New Net Operating Income:

\[ \text{New Net Operating Income} = 400000 - 150000 = 250000 \]

Final Answer