Exercise 517 BreakEven and Target Profit Analysis LO54 LO55

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 $130 per unit. Variable expenses are $91 per stove, and fixed expenses associated with the stove total $163,800 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 11,000 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 $75,000 per month?

Solution

Solution 1:

Sales price = $130 per unit

Variable cost = $91 per unit

Contribution = $130 - $91 = $39 per unit

Fixed Expenses = $163,800

Breakeven point (unit sales) = Fixed Cost / Contribution per unit = $163,800/39 = 4200 units

Breakeven point (Dollar Sales) = 4200*130 = $546,000

Solution 2:

Let selling price and variable expense per unit increased by 10% then

Revised selling price = 130*110% = $143 per unit

Revised variable expense per unit = 91*110% = $100.10 per unit

Revised contribution per unit = $143 - $100.10 = $42.90

Contribution margin = 42.90/143 = 30%

Breakeven point (unit sales) = 163800/42.90 = 3818 units

Breakeven point (Dollar sales) = 163800/30% = $546,000

Therefore, if variable expenses per stove increases as a percentage of selling price then it will result in lower break even point in terms of unit sale. Further break even point will not change in terms of dollar sales.

Solution 3:

Solution 4:

Revised selling price = 130*90% = $117

Revised contribution per unit = $117 - $91 = $26 per unit

To attain profit of $75,000 per month required contribution = Requried profit + Fixed Cost = $75,000 + $163,800 = $238,800

Therefore number of unit to be sold = Required contribution / Contribution per unit

=$238,800/26 = 9185 units