Exercise 5-17 Break-Even and Target Profit Analysis [LO5-4, LO5-5, LO5-6]

Outback Outfitters sells recreational equipment. One of the companys products, a small camp stove, sells for $150 per unit. Variable expenses are $105 per stove, and fixed expenses associated with the stove total $211,500 per month.

Required:

1.

Compute the companys break-even point in unit sales and in dollar sales.

Required:
1.	Compute the companys 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.)

	Higher break-even point
	Lower break-even point

3.	At present, the company is selling 19,000 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 (3) above. How many stoves would have to be sold at the new selling price to yield a minimum net operating income of $74,000 per month? (Round up your answer to the nearest whole number.)

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Problem 5-25A Changes in Fixed and Variable Expenses; Break-Even and Target Profit Analysis [LO5-4, LO5-5, LO5-6]

Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $2.70 per unit. Enough capacity exists in the companys plant to produce 30,700 units of the toy each month. Variable expenses to manufacture and sell one unit would be $1.72, and fixed expenses associated with the toy would total $44,629 per month.

The company's Marketing Department predicts that demand for the new toy will exceed the 30,700 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,231 per month. Variable expenses in the rented facility would total $1.89 per unit, due to somewhat less efficient operations than in the main plant.

Required:

1.	Compute the monthly break-even point for the new toy in unit sales and in dollar sales. (Round "per unit" to 2 decimal places, intermediate and final answers to the nearest whole number.)

2.	How many units must be sold each month to make a monthly profit of $10,449? (Round "per unit" to 2 decimal places, intermediate and final answer to the nearest whole number.)

3.	If the sales manager receives a bonus of 20 cents for each unit sold in excess of the break-even point, how many units must be sold each month to earn a return of 28% on the monthly investment in fixed expenses? (Round "per unit" to 2 decimal places, intermediate and final answer to the nearest whole number.)