Question

CVP analysis, sensitivity analysis. Roughstyle Shirts Co. sells shirts wholesale to major retailers across Australia. Each shirt has a selling price of $40 with $26 in variable costs of goods sold. The company has fixed manufacturing costs of $1,600,000 and fixed marketing costs of $650,000. Sales commissions are paid to the wholesale sales reps at 10% of revenues. The company has an income tax rate of 30%.

Required:

1. How many shirts must Roughstyle sell in order to break even?
2. How many shirts must it sell in order to reach:
   1. a target operating income of $600,000?
   2. a net income of $600,000?
3. How many shirts would Roughstyle have to sell to earn the net income in part 2b if: (Consider each requirement independently.)
   1. the contribution margin per unit increases by 15%.
   2. the selling price is increased to $45.00.
   3. the company outsources manufacturing to an overseas company increasing variable costs per unit by $3.00 and saving 50% of fixed manufacturing costs.

Answer 1

Answer with working is given below

1 Shirts Shirts to be sold Fixed Cost Contribution per unit $2,250,000 H $10 225,000 Fixed Cost Manufacturing cost Marketing cost Total Fixed cost $1,600,000 $650,000 $2,250,000 Contribution per unit Selling price Variable COGS Sales commission Total variable cost Contribution per unit $30 $10 a) Operating Income Fixed Cost Total Target $600,000 $2,250,000 $2,850,000 Shirts Shirts to be sold Total Target Contribution per unit $2,850,000 $10 285,000 Net Income $600,000 30% Tax rate Operating Income Fixed Cost Total Target $857,143 ($600,000/(1-30%) $2,250,000 $3,107,143 Shirts Shirts to be sold Total Target Contribution per unit $3,107,143 310,714 $10 a) Operating Income Fixed Cost Total Target $857,143($600,000/(1-30%) $2,250,000 $3,107,143 Shirts Shirts to be sold Total Target Contribution per unit $3,107,143 $11.50 270,186 Revised contribution margin $11.50 (15% increase over existing) b) Shirts Shirts to be sold Total Target Contribution per unit $3,107,143 $14.50 214,286 $45.00 Contribution per unit Selling price Variable COGS Sales commission - 10% Total variable cost Contribution per unit $26.00 $4.50 $30.50 $14.50 Operating Income Fixed Cost- manufacturing cost Fixed Cost-marketing cost Total Target $857,143 ($600,000/(1-30%) $800,000 Existing Fixed cost/2 $650,000 $2,307,1431 Shirts Shirts to be sold Total Target Contribution per unit $2,307,143 $7.00 329,592 $40.00 $29.00 Contribution per unit Selling price Variable COGS - $26+$3) Sales commission Total variable cost Contribution per unit S4.00 $33.00 $7.00