Question

Outback Outfitters sells a small camp stove for $50 per unit. Variable expenses are $32 per unit, and fixed expenses total $108,000 per month.
At present, the company is selling 8,000 stoves per month. The sales manager is convinced a 10% reduction in the selling price would result in a 25% increase in unit sales. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes.

Answer 1

First, let's outline the current income statement with the present operating conditions and then make the necessary adjustments for the proposed changes.

### Current Operating Conditions

**Current Selling Price per Unit:** $50
**Variable Expenses per Unit:** $32
**Fixed Expenses per Month:** $108,000
**Current Sales Volume:** 8,000 units

**Contribution Margin per Unit Calculation:**
- Contribution Margin = Selling Price - Variable Expenses
- Contribution Margin = $50 - $32 = $18

**Total Contribution Margin:**
- Total Contribution Margin = Contribution Margin per Unit × Sales Volume
- Total Contribution Margin = $18 × 8,000 = $144,000

**Total Income Statement:**
```
Outback Outfitters
Contribution Format Income Statement
For the Month (Current Operations)

Sales Revenue: $400,000 (8,000 units x $50)
Variable Expenses: $256,000 (8,000 units x $32)
----------------------------------------------
Contribution Margin: $144,000
Fixed Expenses: $108,000
----------------------------------------------
Net Operating Income: $36,000
```

### Proposed Changes

**New Selling Price per Unit:**
- 10% reduction from current price: $50 - ($50 × 10%) = $45

**New Sales Volume:**
- 25% increase in unit sales: 8,000 + (8,000 × 25%) = 10,000 units

### Contribution Margin per Unit Under Proposed Changes
- Contribution Margin = Selling Price - Variable Expenses
- Contribution Margin = $45 - $32 = $13

**Total Contribution Margin Under Proposed Changes:**
- Total Contribution Margin = Contribution Margin per Unit × New Sales Volume
- Total Contribution Margin = $13 × 10,000 = $130,000

**Total Income Statement Under Proposed Changes:**
```
Outback Outfitters
Contribution Format Income Statement
For the Month (Proposed Operations)

Sales Revenue: $450,000 (10,000 units x $45)
Variable Expenses: $320,000 (10,000 units x $32)
----------------------------------------------
Contribution Margin: $130,000
Fixed Expenses: $108,000
----------------------------------------------
Net Operating Income: $22,000
```

### Summary of Income Statements

**Current Operations:**
- Sales Revenue: $400,000
- Net Operating Income: $36,000

**Proposed Operations:**
- Sales Revenue: $450,000
- Net Operating Income: $22,000

In summary, if the selling price is reduced and sales volume increases as predicted, the company would actually see an increase in sales revenue, but the net operating income would decrease due to a lower contribution margin per unit.