Question

London Yarn is developing a new line of women's causal dresses. Estimated overhead costs are $400,000 while each dress will cost $10 in labor and materials. They want to know if they should continue with this project. Show all calculations.

a. If the price is set at $90, how many dresses do they need to sell to breakeven? b. If the price is set at $90, how many dresses do they need to sell to earn a target profit of 10%? c. Given a price of $90, how many dresses must they sell to earn a target profit of 10% plus cover a $18,000 advertising budget? d. If they sell 5,500 dresses, what price should they charge (maintaining the 10% target profit and advertising)? e. Given a price of $90, what is the markup on retail? What is the markup on cost?

Answer 1

Overhead costs = $400000

Variable cost per dress = $10

(a) Price per dress = $90

Breakeven point = Overhead Costs / (Price - Variable Cost) = 400000 / (90 - 10) = 5000

(b) Let the number of units sold be x

Revenue = 90x

Profit required = 10% of 90x = 9x

Profit = Sales - Costs = 90x - (400000 + 10x)

=> 90x - 400000 - 10x = 9x

=> 71x = 400000

=> x = 5634 dresses

(c) Marketing Cost = 18000

Let the number of units sold be x

Revenue = 90x

Profit required = 10% of 90x = 9x

Profit = Sales - Costs = 90x - (400000 + 10x + 18000)

=> 90x - 418000 - 10x = 9x

=> 71x = 418000

=> x = 5888 dresses

(d) Number of dresses sold = 5500

Let the price charged be p

Hence, Revenue = 5500p

Profit Required = 10% of 5500p = 550p

Profit = Sales - Costs = 5500p - (400000 + 10*5500 + 18000)

=> 5500p - (400000 + 10*5500 + 18000) = 550p

=> 4950p = 473000

=> p = $95.56