Question

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 $16.00 each with a minimum order of 240 sweatshirts. Any additional sweatshirts would have to be ordered in increments of 50. 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 $32.00 each. Hooper would pay the students a commission of $6.00 for each shirt sold. Required: 1. What level of unit sales and dollar sales is needed to attain a target profit of $6,500? 2. Assume that Hooper places an initial order for 240 sweatshirts. What is his break-even point in unit sales and dollar sales? (Round your intermediate calculations and final answers to the nearest whole number.) 1. 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

Solutions:

Given, Selling Price per unit $32

Variable cost is equal to $16

Fixed cost is just equal to commission to Student

i.e.$6 * 240= 1440

Now,

Contribution = Sales - Variable cost

= 32 -16.  

= 16

Profit Volume Ratio =( Contribution/ Sales)* 100

= 50%

Target sale to achieve a profit of $ 6500

Target sale = ( Fixed Cost + Profit )/ Profit Volume Ratio.   

= ( 1440 + 6500) / 50%

= $ 15880

Sale in units = ( Fixed cost + Profit )/ Contribution per unit

= (1440 + 6500) / 16

= 496 unit approximately

Break even in unit = Fixed Cost / Contribution per unit

= 1440 / 16

= 90 units

Break even in dollars = Fixed cost / Profit Volume Ratio

= 1440 / 50%

= $ 2880