Question

The Shirt Works sells a large variety of tee shirts and sweatshirts. Steve Hooper, the owner, is thinking of expanding his sales by hiring high school students, on a commission basis, to sell sweatshirts bearing the name and mascot of the local high school. These sweatshirts would have to be ordered from the manufacturer six weeks in advance, and they could not be returned because of the unique printing required. The sweatshirts would cost Hooper $17.00 each with a minimum order of 200 sweatshirts. Any additional sweatshirts would have to be ordered in increments of 50. Since Hooper’s plan would not require any additional facilities, the only costs associated with the project would be the costs of the sweatshirts and the costs of the sales commissions. The selling price of the sweatshirts would be $34.00 each. Hooper would pay the students a commission of $5.00 for each shirt sold. Required: 1. To make the project worthwhile, Hooper would require a $10,200 profit for the first three months of the venture. What level of unit sales and dollar sales would be required to reach this target net operating income? (Round your intermediate calculations to 2 decimal places.) 2. Assume that the venture is undertaken and an order is placed for 200 sweatshirts. What would be Hooper’s break-even point in unit sales and in dollar sales? (Round your intermediate calculations to the nearest whole number. Round up your final break even answers to the nearest whole number.)

Answer 1

Solution 1:

Target Profit = $10,200

Margin Per unit = $34 - $17 - $5 = $12 per unit

Therefore, unit sales required to reach target profit= $10200 / $12 = 850 units

Dollar sales required = Units* selling Price = 850*$34 = $28,900

Solution 2:

Cost of 200 Sweatshirts (Fixed Cost) = 200*$17 = $3400

contribution per unit = Sales Price - Sales Commission = $34- $5 = $29

Break Even units = $3400 / $29 = 117.24 = 117 units (rounded) or it may be taken as 118 units (rounded up)

Break even dollar sales (if 117 units taken) = 117*$34 = $3,978

Break even dollar sales (if 118 units taken) = 118*$34 = $4,012