Question

Dorcan Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break-even. The after tax net income last year was $5,040. Donnelly's expectations for the coming year include the following: (CMA adapted)

The sales prtice of the T-shirts will be $9. Variable cost to manufacture will increase by one-third. Fixed costs will increase by 10%. The income tax rate of 40% will be unchanged.

The selling price that would maintain the same contribution margin ratio as last year is: A)$9.00. B) $10.00. C) $8.00. D) $9.50.

Answer 1

Ans.B . 10.00

Last year's contribution margin ratio =. (selling price - variable cost per unit) / selling price per unit * 100

(7.50 - 2.25) / 7.50 * 100

5.25 / 7.50 * 100

70%

Current year:

New variable cost per unit. = 2.25 + 33.33%

= 3 per unit

(1/3 Increase in variable cost per unit = increase of 33.33%)

To maintain the same contribution margin ratio (70%) as previous year, we need the 10 per unit of selling price.

If the contribution margin ratio = 70% of sales then the variable cost ratio = 30% of sales

Selling price per unit = variable cost per unit / variable cost ratio

= . 3 / 30%

=. $10 per unit