XYZ Corp. 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 $205,800 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 10,000 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 $79,000 per month? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 At present, the company is selling 10,000 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. Contribution Income Statement Sales Variable expenses Required 4 Outback Outfitters $ Present 10,000 Stoves Per unit 100,000 $ 140 S 980,000 (880,000) $ 140 Total (880,000) < Required 2 Proposed Total 1,400,000 Stoves $ 1,400,000 Per unit 1,400,000 $ Required 4 > 0
XYZ Corp. 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 $205,800 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 10,000 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 $79,000 per month? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 At present, the company is selling 10,000 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. Contribution Income Statement Sales Variable expenses Required 4 Outback Outfitters $ Present 10,000 Stoves Per unit 100,000 $ 140 S 980,000 (880,000) $ 140 Total (880,000) < Required 2 Proposed Total 1,400,000 Stoves $ 1,400,000 Per unit 1,400,000 $ Required 4 > 0
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:**Educational Content: Break-Even Analysis and Contribution Margin**
**Scenario Overview:**
XYZ Corp. sells recreational equipment, including a small camp stove priced at $140 per unit. The variable expense per stove is $98, and the company faces fixed expenses totaling $205,800 monthly.
**Key Questions:**
1. **Determine the Break-Even Point:**
- Calculate both in units and dollar sales.
2. **Impact of Variable Expense Changes:**
- Analyze how increasing variable expenses as a percentage of the selling price affects the break-even point.
3. **Effect of Pricing Strategy:**
- Explore the potential effect of a 10% price reduction on sales and profits.
- Prepare contribution format income statements for current and proposed conditions.
4. **Target Profit Analysis:**
- Calculate the number of stoves needed to reach a $79,000 monthly profit under new pricing.
**Contribution Income Statement Analysis:**
- **Present Conditions:**
- **Sales**: 10,000 stoves at $140 each, totaling $1,400,000.
- **Variable Expenses**: Total $980,000.
- **Contribution Margin**: $420,000.
- **Proposed Conditions:**
- After a 10% price reduction, recalculate the income statement.
- Present the changes in contribution margin and overall sales.
**Understanding Break-Even Analysis:**
- **Break-Even Point**: Where total sales equal total expenses, resulting in zero profit.
- **Contribution Margin**: Sales price minus variable costs; it helps cover fixed costs.
**Graph/Diagram Explanation:**
The table displays financial data categorized into "Present" and "Proposed" conditions, showcasing sales, expenses, and contribution margins. It illustrates the impact of pricing and cost changes on profitability, aiding in strategic decision-making.
This analysis equips students with foundational knowledge in financial assessment, demonstrating the importance of pricing strategies and cost management in business profitability.
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