Question

Big Al Athletic Apparel annually sells 20,000 University of West Florida branded cotton T-shirts through distributors who then sell the shirts for $15 to retailers like Dick’s Sporting Goods who then sell them on to consumers for $25 each. Big Al’s costs of goods are $5 per shirt and they are required to pay a licensing fee to UWF for $1 for every shirt that they sell via distributors. This fee is only charged on those shirts sold to the distributors. The distributors’ margins are 20%.

1. Create a Value Chain for the shirts by filling in the blanks

Consumer Price	$25
Dick’s Purchase Price
Dick’s Margin
Distributor Purchase Price
Distributor Margin
Big Al’s Gross Margin ($)
Big Al’s Gross Margin (%)
Big Al’s Contribution Margin ($)
Big Al’s Contribution Margin (%)

2. After a very disappointing football and basketball season for the Gators, Big Al’s is considering lowering the price to increase T-shirt demand. If Big Al’s decided to reduce its price on the T-Shirts by $50, how additional units would it need to break even?

Multiple Choice

1. Big Al’s new contribution margin after the price discount is:

1. $6
2. $4.50
3. $3.50
4. $2.50
5. None of these

2. What is the incremental number of units that Big Al’s needs to sell to break even on the price discount?

1. 20,000
2. 14,286
3. 34,286
4. 50,000
5. None of these

Answer 1

Solution:

A Value Chain for the shirts:

Consumer Price $25

(Given)

Dick’s Purchase Price $15

(Given)

Dick’s Margin $10

(25-15)

Distributor Purchase Price $12.5

15 * (100/120)

Distributor Margin $2.5

(15-12.5)

Big Al’s Gross Margin ($) $7.5

(12.5-5)

Big Al’s Gross Margin (%) 60%

(7.5/12.5)*100

Big Al’s Contribution Margin ($) 11.5

(12.5-1)

Big Al’s Contribution Margin (%) 92%

(11.5/12.5)*100

NOTE:

Question is given that If Big Al’s decided to reduce its price on the T-Shirts by $50, which is illogical.Since its selling price to distributor's itself $12.5.So it can't reduced price by $50.More over i referred this question from trusted source of books and it was written as  "If Big Al’s decided to reduce its price on the T-Shirts by $2.50".So to continue further i am taking that price reduced by $2.50

Big Al's new contribution margin after the price discount is:

Revised selling price per T-shirt---$10

Contribution margin new =$9 (10-1)

hence,

answer None of these

New contribution Margin is: $9  

  

The incremental number of units that Big Al's needs to sell to breakeven on the price discount are 1932,

hence,

answer --None of these

Fixed overhead: $80,000

fixed over head=(units*fixed cost per unit)

=(units*(contribution marigin - gross margin))

=(20,000x(11.5-7.5))

=(20,000x$4)

=$80,000

a.Contribution before revision of selling price per T-shirt=$11.50 and

Break even Units=Fixed cost/Contribution per T shirt

=$80,000/$11.50

=6,957 T shirts

b.Contribution after the  revision of selling price per T-shirt=$9 and

Break even Units=Fixed cost/Contribution per T shirt

=$80,000/$9

=8,889  T shirts

c .Incremental number of units or T shirt=(a-b)

=8,889-6,957

=1,932

--------------HOPE THIS IS HELPFUL