Question

Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $90 per unit. Variable expenses are $63 per stove, and fixed expenses associated with the stove total $113,400 per month.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.

Answer 1

Current Situation = $399,600

Proposed Situation = $314,100

Step-by-step explanation:

Given,

Current Scenario,

Sales Price = $90

Variable Expense = $63

Fixed Cost =$113,400

Proposed Scenario,

Sales Price =$90 - ($90*10%) =$81

Variable Cost =$63

Fixed Cost = $113,400

Outfitters Recreational

Income Statement (Contribution Margin)

Particulars Current Proposed

(19,000) (23,750)

Sales 1,710,000 1,923,750

(-) Variable Cost (1,197,000) (1,496,250)

Contribution

Margin 513,000 427,500

(-) Fixed Cost (113,400) (113,400)

Net Income 399,600 314,100

Therefore, current scenario is better.