Question

PROBLEM 4-24 Break-Even and Target Profit Analysis [LO5, LO6] The Shirt Works sells a large variety of T-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. To make the project worthwhile, Hooper would require a $1,200 profit for the first three months of the venture, What level of unit sales and dollar sales would be required to reach this target net op- erating income? Show all computations. 2. Assume that the venture is undertaken and an order is placed for 75 sweatshirts, What would be Hooper's break-even point in unit sales and in dollar sales? Show computations and explain the reasoning behind your answer. CHECK FIGURE s00 sweatshirts to achieve target profit of 1,200; Break-even in units-50 sweatshirts. PRORIE

Answer 1

1
	S.P. of one unit			13.5
	Less-   Cost			-8
	Less- commission			-1.5
	Contribution per unit		4
	Profit required			1200
	Units required to achieve profit	1200/4
				=	300 units
	Sales in dollar		300*13.5	$4050
2	Orders placed for 75 units
		Total sales	75*13.5	1012.5
	Less	Cost		75*8	600
	Less	commission	75*1.5	112.5
		Contribution		300
	In the question no fixed cost is given