Question

Hoodys for Good manufactures and sells hooded sweatshirts. The company locates its manufacturing facilities in areas with high unemployment rates and provides on-site daycare and education for its employees’ children. The company recently started a “one for one” program where they donate one sweatshirt for every one sold to an international charity to provide to a child in need. The customer pays the shipping cost for items purchased, but the company pays to ship to the international charities. Cost information is summarized below: Variable Costs Direct Materials $3.20 per unit produced Direct Labor $2.70 per unit produced Variable Manufacturing Overhead $0.70 per unit produced Shipping $2.80 per unit donated Fixed Costs Salaries $22,000 per month Advertising $55,000 per month Production Equipment $42,000 per month Answer each of the following independent questions. 1. Assume that the price of each sweatshirt sold is $30. a. How much contribution margin is earned on each unit sold to a paying customer? (Round your final answers to 2 decimal places.) b. How much contribution margin is lost on each unit donated to charity? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) c. If one sweatshirt is donated for each one sold, what is the weighted-average contribution margin per unit produced? (Round your answers to 2 decimal places.) d. How many total units must be produced to break-even? How many must be sold and how many donated? 2. If the company expects to sell 4,700 sweatshirts and donate 4,700 sweatshirts per month, what price must be charged to earn a target profit of $22,000 per month? 3. Assume that Hoodys for Good's managers are trying to decide whether to set the price at $40 or $65. If the price is set at $40, they think they can sell 10,200 units (and donate 10,200 units). If the price is set at $65, they only expect to be able to sell (and donate) 5,700 units. a. If the company’s goal is to maximize economic profit, what price should they charge? b. If the company’s goal is to do the most social good, what price should they charge?

Answer 1

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AS FOR GIVEN DATA...

Solution 1:

Variable cost of manufacturing Sweat Shirt = $4 + $3.50 + $0.60 = $8.10 per unit

Selling price of Sweat shirt = $35

a. Contribution margin per unit of paying customer = $35 - $8.10 = $26.90

Shipping cost of sweat shirt = $4

Variable cost of donating sweat shirt = $8.10 + $4 = $12.10

b. Contribution margin for donation to charity = $0 - $12.10 = -$12.10

c. If one unit is sold and one unit is donated then

contribution margin on 2 units = Sales per unit - Variable cost for 2 unit

= $35 - ($8.10 + $12.10) = $14.80

Weighted average contribution margin per unit = $14.80/2 = $7.40

Fixed Cost per month = $30,000 + $60,600 + $50,000 = $140,600

d. Breakeven sales = Fixed cost / Weighted average contribution per unit = $140,600 / $7.40 = 19000 units

Therefore 9500 units to be sold and 9500 units to be donated

Solution 2:

If company expect to sell 5500 sweatshirt and donate 5500 sweatshirts:

Target profit = $23,300

Required contribution = $23,300 + $140,600 = $163,900

Variable cost of 11000 units = (5500*8.10) + (5500*12.10) = $111,100

Required Sale value to acheived target profit = Required contribution + Variable cost = $163,900 + $111,100 = $275,000

Required selling price = $275,000/5500 = $50 per sweatshirt.

Therefore at price $50 per sweatshirt company will achieve target profit of $23,300 at 11000 unit level.

Solution 3:

Variable cost at 22000 units level = (11000*8.10) + (11,000*12.10) = $222,200

Variable cost at 13000 units level = (6600*8.10) + (6500*12.10) = $131,300

Profit at price of $45 per sweatshirt = (11000*45) - $222,200 - $140,600 = $132,200

Profit at price of $65 per sweatshirt = (6500*65) - $131,300 - $140,600 = $150,600

a. If company's goal is to maximized economic profit the should charge $65 per sweatshirt from customer.

b. If company's goal is to do most social good, they should charge $45 per sweatshirt from customer.