Question

A company sells a large variety of T-shirts and sweatshirts. The owner is thinking of expanding sales by hiring local 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 cannot be returned because of the unique printing required. The sweatshirts would cost the owner € 8 each with a minimum order of 75 sweatshirts. Any additional sweatshirts would have to be ordered in bunches of 75. Since the owner has no plan to buy any additional facilities or features, the only cost 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. The owner would pay the students a commission of € 1.50 for each shirt sold. Required 1. The owner requires a € 1,200 profit for the first three months of the venture. What level of sales in units and in Euro (€) would be required to reach this target profit? Show calculations. Assume that the venture is undertaken and an order is placed for 75 sweatshirts. What would be the owner's break-even point in units and in Euro (€)? Show your calculations and explain the reasoning behind your answer.

Answer 1

1

Sale price of 75 shirts at €13.50		1012.50
Less variable cost
Cost of shirt at €8.00 each	600
Sale commission at €1.50each	112.50	(712.50)
Contribution per 75 shirts		300.00
Contribution per shirt(300/75)		4.00

Number of pair of shirts to be sold to earn Target profit=(fixed cost+Target profit)/contribution margin per unit

= (0+1200)/4

= 300 units of sweatshirts

Sales in euro to achieve Target profit = units* selling price per unit

=300*€13.50 =€4050

2.Breakeven point

   Contribution margin per unit=sales price - variable costs

= 13.50 - 1.50 = 12

Fixed Costs = 75*8= 600

Break even point = Fixed costs/ contribution margin per unit

=€600/12= 50 shirts

Break even point in sales euro = 50*€13.50= €675