Question

Problem 5-24 Break-Even and Target Profit Analysis [LO5-5, LO5-6] 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? 1. Unit sales needed to attain the target profit sweatshirts Dollar sales needed to attain the target profit 2. Break-even point in unit sales sweatshirts Break-even point in dollar sales

Answer 1

1. Calculate unit sales and dollar sales needed to attain target profit as shown below: Target profit is $1,200. Selling price per sweatshirt is $13.50. Cost of sweatshirt is $8. Commission on sweatshirt is $1.50. Net profit per Sweatshirt - Selling price of sweatshirt Cost Commission $13.50 - $8 -$1.50 - $4 Now, compute the unit sales needed for target profit. Target profit Net profit per sweatshirt Units sales for target profit- $1,200 $4 300 units. Now, calculate sales dollar to earn target profit. Sales dollars-Sales units x Sale price 300 x $13.50 $4,050 Therefore, to earn target profit level of unit sales are 300 units and dollars sales are $4,050.

2. Calculate break-even point in unit sales and in dollar sales. Due to unique printing the sweatshirts are not returnable. So, the cost of sweatshirts become the fixed cost. Fixed cost-Initial orderx Cost per sweatshirt = $600 Now, compute the break-even point unit sales and dollars as below: Fixed cost Break-even pomt in unit sales Sale price-Commission $600 $13.50 - $1.50 - 50 Break-even sales dollars- Break-even unit salexSale price 50 x $13.50 $675 Therefore, break-even point in unit sales are 50 units and break-even sales dollars are $675.