Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $100 per unit. Variable expenses are $70 per stove, and fixed expenses associated with the stove total $129,000 per month.

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $100 per unit. Variable expenses are $70 per stove, and fixed expenses associated with the stove total $129,000 per month.

Required:

1.

Compute the company’s break-even point in unit sales and in dollar sales. Explanation: 1. Profit   =   (Unit CM × Q) − Fixed expenses $0   =   (($100 − $70) × Q) − $129,000 $0   =  ($30 × Q) − $129,000 $30Q   =   $129,000 Q   =   $129,000 ÷ $30 per stove Q   =   4,300 stoves, or at $100 per stove, $430,000 in sales Alternative solution: Unit sales to break even = Fixed expenses Unit contribution margin   = $129,000   = 4,300 stoves   $30 per stoves or at $100 per stove, $430,000 in sales 2. An increase in variable expenses as a percentage of the selling price would result in a higher break-even point. If variable expenses increase as a percentage of sales, then the contribution margin will decrease as a percentage of sales. With a lower CM ratio, more stoves would have to be sold to generate enough contribution margin to cover the fixed costs. 3. Proposed number of stoves: 19,000 stoves × 1.25 = 23,750 stoves Proposed sales price of stoves: $100 per stove × 0.9 = $90 per stove A 25% increase in volume is not enough to offset a 10% reduction in the selling price; thus, net operating income decreases. 4. Profit   =   (Unit CM × Q) − Fixed expenses $71,000   =   (($90 − $70) × Q) − $129,000 $71,000   =   ($20 × Q) − $129,000 $20Q   =   $200,000 Q   =   $200,000 ÷ $20 per stove Q   =   10,000 stoves Alternative solution: Unit sales to attain target profit = Target profit + Fixed expenses Unit contribution margin           = $71,000 + $129,000 $20   = 10,000 stoves