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 $8 each with a minimum order of 75 sweatshirts. Any additional sweatshirts would have to be ordered in increments of 75.

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 $13.50 each. Hooper would pay the students a commission of $1.50 for each shirt sold.

Required:

1. What level of unit sales and dollar sales is needed to attain a target profit of $1,200?
2. Assume that Hooper places an initial order for 75 sweatshirts. What is his break-even point in

unit sales and dollar sales?

Answer 1

1) Unit Sale and dollar value sales is needed to attain a target profit $1,200 is calculated below:

a) Unit sale = (Fixed Cost + Desired Profit )/ Contribution Margin Per Unit

Given That:

Fixed Cost = $0 (Not Given

Desired Profit = $1,200

Sale Price per unit = $13.50

Variable Cost per unit = $8 + $1.50 = $9.50

Unit Sales = (0$ + $1200) /($13.50 - $9.50)

= $1,200/$4

= 300 Sweatshirts

So unit sales is 300 sweatshirts

Total sale in dollar = 300 sweatshirts * 13.50 Selling price per shirt

= $4,050

Total sale in dollar is $4,050

2)Break event sale in units and break even point in dollar is calculated below:

The order of 75 sweatshirts is already ordered

So Fixed per unit is = purchase price that is $ 8 per unit

Fixed cost = 75 sweatshirts* purchase price per sweatshirt

= $600

New variable cost per unit = $1.50 per unit

a) Break even point in Units = Fixed Cost / Contribution margin per unit

=$600 /($13.50 - $1.50)

= $600/$12

= 50 sweatshirts

Break even point in units = 50 sweatshirts

b)Break even point in dollar = 50 sweatshirts* 13.50 Selling price per sweat shirt

= $675

Break even point in dollar = $675