Question

he 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?

Answer 1

Below is the solution please comment if any further clarification needed

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1.

Sale price of 75 shirts at $13.50		$1,012.50
Less: Variable costs:
Cost of shirt at $8.00 each	$ 600.00
Sale commission at $1.50 each	$ 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 costs + Target profit) / Contribution margin per unit

= (0 + 1,200) / 4

= 300 units of sweatshirts

Dollar Sales = 300 units * $13.5 = $4,050

2. 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 dollar = 50 * $13.50 = $675