Question

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $140 per unit. Variable expenses are $98 per stove, and fixed expenses associated with the stove total $176,400 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 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 Required 3. How many stoves would have to be sold at the new selling price to attain a target profit of $80,000 per month?

Answer 1

Answer:

Instructions are listed below

Explanation:

Giving the following information:

selling price= $140 per unit.

Variable expenses are $98 per stove

Fixed expenses associated with the stove total of $176,400 per month.

1) Break-even point (units)= fixed cost/ contribution margin

Break-even point (units)= 176400/(140-98)= 4200 units

Break-even point (dollars)= fixed costs/ contribution margin rate

Break-even point= 176400/[(140-98)/140]= $588,000

2) Let's assume that the selling and variable costs increase by 10%

Break-even point (units)= 176400/(154- 107.8)= 3818 units

As the denominator increases, fewer units are necessary to cover fixed costs.

3) Normal condition:

Sales= 140*16000= 2,240,000

Variable costs= 98*16000= 1,568,000

Gross income= 672,000

Fixed costs= 176400

Net operating income= 495,600

New condition:

Price= $126; Sales= 20,000 units

Sales=20000*126= 2,520,000

Variable costs= 98*20000= 1,960,000

Gross profit= 560,000

Fixed costs= 176400

Net operating income= 383,600

4) Profit= 80,000

Break-even point (units)= (fixed costs + profit)/contribution margin

Break-even point (units)= (176400 + 80000)/(126 - 98)= 9157 units

Answer 2

1a. The break-even point in unit sales for Outback Outfitters is 4,200 units.

= Fixed Cost/Contribution margin per unit

= $176,400/$42

= 4,200 units

1b. The break-even point in sales dollars for Outback Outfitters is $588,000.

= Fixed Cost/Contribution margin ratio

= $176,400/30%

= $588,000

2. If the variable expenses per stove increase as a percentage of the selling price, it will result in a higher break-even point.

3. Two Contribution format income statements:

                                           Current       Proposed

Sales units                          16,000            20,000

Sales revenue           $2,240,000     $2,100,000

Variable cost             $1,568,000      $1,960,000 ($98 x 20,000)

Contribution margin $672,000         $140,000

Fixed expenses             176,400          $176,400

Net income (loss)      $495,600          ($36,400)

Sales units per month = 16,000

Selling price per unit = $105 ($140 x 1 - 10%)

New sales units per month = 20,000 (16,000 x 1.25)

Variable expenses per unit = $98

Contribution margin per unit = $7 ($105 - $98)

Contribution margin ratio = 6.67%

4. The number of stoves to be sold at the new selling price to attain a target profit of $80,000 per month is 36,629 units.

= (Fixed cost + Target profit)/Contribution margin per unit

= ($176,400 + $80,000)/$7

=36,629 units.

What is the break-even analysis?

The break-even analysis is an accounting technique for determining the units or dollars that need to be achieved so that the company can make no loss or profit.

At such a point the total revenue equals the total costs (fixed and variable).

The point at which the above objective can be achieved is called the break-even point (in units or dollars).

Data and Calculations:

Sales price per unit = $140

Variable expenses per unit = $98

Fixed expenses per month = $176,400

Contribution margin per unit = $42 ($140 - $98)

Contribution margin ratio = 30% ($42/$140 x 100)

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