Question

L Jutlet Income Jueu to break even? To earn net income of $159,600? ome if the number of customers is 145,000. 13.000 2.23 CVP analysis, sensitivity analysis. Tuff Kids Jeans Co sells blue jeans wholesale to major retauer across the country. Each pair of jeans has a selling price of $30 with $21 in variable costs of goods sold The company has fixed manufacturing costs of $1.200.000 and fixed marketing costs of $300,000. Sales commissions are paid to the wholesale sales reps at 5% of revenues. The company has an income tax rate of 25% 1 How many jeans must Tuff Kids sell in order to break even? 2 How many jeans must the company sell in order to reach: a. a target operating income of $450,000? b. a net income of $450,000? 3. How many jeans would TuffKids have to sell to earn the net income in part 2b if (consider each require- ment independently). a. The contribution margin per unit increases by 10% b. The selling price is increased to $32.50 c. The company outsources manufacturing to an overseas company increasing variable costs per unit by $2.00 and saving 60% of fixed manufacturing costs. 24 CVD .

Answer 1

Part 1

CMU = $30−$21 − (0.05 × $30) = $7.50

Q = (FC/CMU) = $1500000/7.50 = 2, 00,000 pairs

Part 2a

Q = (FC + TOI)/CMU

Q = (1500000 + 450000)/7.50

Q = 1950000/7.5

Q = 260000 pairs

Part 2b

Target operating income = target net income / (1 – tax rate)

Target operating income = 450000 / (1 – 0.25)

Target operating income = 600000

Quantity of output units required to be sold

                = (fixed costs + target operating income) / contribution margin per unit

                = (1500000 + 600000) / 7.50

                = 280000 pairs

Part 3a

Contribution margin per unit increases by 10%

Contribution margin per unit = 7.50 X 1.10 = 8.25

Quantity of output units required to be sold

                = (fixed costs + target operating income) / contribution margin per unit

                = (1500000 + 600000) / 8.25

                = 254545 pairs (rounded)

The net income target in units decreases from 280,000 pairs in requirement 2b to 254,545 pairs

Part 3b

Increasing the selling price to $32.50

Contribution margin per unit = 32.50 − 21 − (0.05 × 32.50) = 9.875

Quantity of output units required to be sold

                = (fixed costs + target operating income) / contribution margin per unit

                = (1500000 + 600000) / 9.875

                = 212658 pairs (rounded)

The net income target in units decreases from 280,000 pairs in requirement 2b to 212,658 pairs

Part 3c

Increase variable costs by $2.50 per unit and decrease fixed manufacturing costs by 50%.

Contribution margin per unit = 30 – 23 (21 + 2) – (0.05 × $30) = 5.50

Fixed manufacturing costs = (1 – 0.6) × 1200000 = 480000

Fixed marketing costs = 300000

Total fixed costs = 480000 + 300000 = 780000

Quantity of output units required to be sold

                = (fixed costs + target operating income) / contribution margin per unit

                = (780000 + 600000) / 5.50

                = 250909 pairs (rounded)

The net income target in units decreases from 280,000 pairs in requirement 2b to 250,909 pairs