Break-Even and Target Profit Analysis
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.
1. Compute the break-even point in number of stoves and in total sales dollars.
2. If the variable expenses per stove increases as a percentage of the selling price, will it result in a higher or a lower break-even point? Why? (Assume that the fixed expenses remain unchanged.)
3. At the 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 income statements, one under present operating conditions, and one as operations would appear after the proposed changes. Show both total and per unit data on your statements.
4. Refer to the data in (3) above. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $35,000 per month?