Can someone help explain IN DETAIL how to get the answers for the second part of
ID: 2388346 • Letter: C
Question
Can someone help explain IN DETAIL how to get the answers for the second part of the question where it asks about how it would appear AFTER the proposed changes?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.
At 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 format 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.
Explanation / Answer
Total
Per Unit
Total
Per Unit
Sales
400,000
50
450,000
45
Variable
256,000
32
320,000
32
Cont. Margin
144,000
18
130,000
13
Fixed
108,000
13.50
108,000
10.80
Net Income
36,000
4.50
22,000
2.20
A 10% reduction in price: $50 * 10% = $50 * 0.10 = $5.
Reduce the price by $5: $50 -$5 = $45. The new price is $45 – this is the per unit price.
25% Increase in sales: 8,000 * 25% = 8,000 * 0.25 = 2,000.
Increase number of sales by 2,000: 8,000 + 2,000 = 10,000.
Total sales equal number sold times sales price: 10,000 * $45 = $450,000.
Variable costs per unit remain the same, but since there are now 10,000 units, variable costs equal 10,000 * $32 = $320,000.
Contribution margin per unit: $45 - $32 = $13.
Total contribution margin: 10,000 * $13 = $13,000.
Fixed costs in total remain the same: $108,000. To get per unit, divide by 10,000 units: $108,000/10,000 = $10.80.
Net income per unit = contribution margin per unit minus fixed costs per unit: $13 - $10.80 = $2.20.
Net income = total contribution margin minus fixed costs: $130,000 - $108,000 = $22,000.
Total
Per Unit
Total
Per Unit
Sales
400,000
50
450,000
45
Variable
256,000
32
320,000
32
Cont. Margin
144,000
18
130,000
13
Fixed
108,000
13.50
108,000
10.80
Net Income
36,000
4.50
22,000
2.20