Exercise 5-12 Break-Even and Target Profit Analysis [LO4, LO5, LO6]
Reveen
Products sells camping equipment. One of the company’s products, a camp
lantern, sells for $90 per unit. Variable expenses are $63 per lantern,
and fixed expenses associated with the lantern total $135,000 per
month.
|
| Required: | |
| 1. |
Compute the company’s break-even point in number of lanterns and in total sales dollars. (Omit the "$" sign in your response.)
|
| Number of lanterns | 5,000  |
| Total sales dollars | $ 450,000 |
| 2. |
If
the variable expenses per lantern 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 |
| 3. |
At
present, the company is selling 8,000 lanterns per month. The sales
manager is convinced that a 10% reduction in the selling price will
result in a 25% increase in the number of lanterns sold each month.
Prepare two contribution format income statements, one under present
operating conditions, and one as operations would appear after the
proposed changes. (Input all amounts
as positive values except losses which should be indicated by a minus
sign. Omit the "$" sign in your response.)
|
Present
8,000 lanterns |
Proposed
10,000 lanterns | |||
| Total | Per Unit | Total | Per Unit | |
| Sales | $ 720,000 | $ 90 | $ 810,000 | $ 81 |
| Variable expenses | 504,000 | 63 | 630,000 | 63 |
| Contribution margin | 216,000 | $ 27 | 180,000 | $ 18 |
| Fixed expenses | 135,000 | 135,000 | ||
| Net operating income (loss) | $ 81,000 | $ 45,000 | ||
| 4. |
Refer
to the data in (3) above. How many lanterns would have to be sold at
the new selling price to yield a minimum net operating income of $72,000
per month?
|
| Number of lanterns to be sold | 11,500 |
