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.
(b) 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? Why? (Assume that the fixed expenses remain unchanged.)

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shubhamsinha3013 shubhamsinha3013 · Answer 1 · 2022-08-27T11:01:05+02:00

If the variable expenses per stove increase as a percentage of the selling price, it will result in a lower Break-even point.

To show this we can take an example:

Assume the Selling price increases by 10% from $50 to $55.

Initially, the variable cost as a percentage of the selling price is (32/50)*100 = 64% of the selling price,

Now, variable cost increases to $55*64%, which is $35.20 per unit.

Since there is a change in selling price and variable cost, the contribution margin per unit will also be affected.

New Contribution per unit= 55- 35.20 = $19.80

Now, calculating the Break-even point in units we use the below-mentioned formula:

Break-even point (in units) = Fixed cost/Contribution per unit

Now, substituting the given values in the above formula we get,

Break-even point (in units)= $108,000/19.80

= 5454 units

Thus Break-even point reduces from 6000 units to 5454 units.

Hence, If the variable expenses per stove increase as a percentage of the selling price, it will result in a lower Break-even point.

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