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 $21.00 each with a minimum order of 240 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 $42.00 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 $12,800 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? (Do not round intermediate calculations.)

sales level in units= ? sweatshirts

sales level in dollars=?

2. Assume that the venture is undertaken and an order is placed for 240 sweatshirts. What would be Hooper’s break-even point in unit sales and in dollar sales? (Round your intermediate calculations and final answers to the nearest whole number.)

break even point in units= ? sweatshirts

break even point in sales dollars=?

Answer 1

Contribution per unit = Selling price - Variable cost

= $42 - $21 - $5

= $16

1)

Sales units to attain target profit = Target profit / Contribution per unit

= $12,800 / $16

= 800 units

Breakeven sales = Breakeven units X Selling price per unit

= 800 units X $42 = $33,600

2)

Fixed cost = $21 X 240 sweatshirts = $5,040

Contribution per unit = Selling price per unit - Student commission per unit

= $42 - $5

= $37

Breakeven point in units = Fixed cost / Contribution per unit

= $5,040 / $37

= 136 units

Breakeven point in dollar sales = Breakeven units X Selling price

= 136 units X $42

= $5,712