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? sweatshirts Unit sales needed to attain the target profit Dollar sales needed to attain the target profit Break-even point in unit sales Break-even point in dollar sales sweatshirts

Answer 1

1	Unit sales needed to attain target profit	=	300	Sweatshirts
	Dollar sales needed to attain target profit	=	$    4,050
2	Break - even point in unit sales	=	50	Sweatshirts
	Break - even point in dollar sales	=	$        675
	Workings:
1	Sales Price per unit	=	$    13.50
	Cost of goods sold per unit	=	$       8.00
	Commission expenses	=	$       1.50
	Contribution per unit	=	$             4
	Target Profit	=	$    1,200
	Unit sales needed to attain target profit	=	Target profit / Contribution per unit
		=	$1200 / $4
		=	300	Sweatshirts
	Dollar sales needed to attain target profit	=	Unit sales needed to attain target profit X Sales Price per unit
		=	300 Sweatshirts X $13.5
		=	$    4,050
2	Initial order	=	75	Sweatshirts
	Initial order cost	=	Initial order units X Cost of goods sold per unit
		=	75 Sweatshirts X $8
		=	$        600
	Break - even point in unit sales	=	Initial order cost / (Selling price - Commission expenses)
		=	$600 / ($13.50 - $1.50)
		=	50	Sweatshirts
	Break - even point in dollar sales	=	Break - even point in unit sales X Sales Price per unit
		=	50 Sweatshirts X $13.5
		=	$        675