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 $24.00 each with a minimum order of 360 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 $48.00 each. Hooper would pay the students a commission of $7.00 for each shirt sold.

Required:

1. What level of unit sales and dollar sales is needed to attain a target profit of $11,900?

2. Assume that Hooper places an initial order for 360 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.)

Answer 1

SOLUTION

1. The contribution margin per sweatshirt would be:

	Amount ($)	Amount ($)
Selling price		48.00
Variable expenses:
Purchase cost of the sweatshirts	24.00
Commission to the student sales persons	7.00	31.00
Contribution margin		17.00

Number of pairs to be solt to earn a targeted profit =

= (Fixed costs + target profit) / Contribution margin per unit

=($0 + $11,900) / $17

= $11,900 / $17

= 700 sweatshirts

In total sales =  700 sweatshirts * $48 = $33,600

2.

Since an order has been placed, there is now a “fixed” cost associated with the purchase price of the sweatshirts (i.e., the sweatshirts can’t be returned). For example, an order of 360 sweatshirts requires a “fixed” cost (investment) of $8,640 (360 sweatshirts * $24.00 per sweatshirt). The variable cost drops to only $7.00 per sweatshirt, and the new contribution margin per sweatshirt becomes:

Selling price	48.00
Variable expenses (commissions only)	7.00
Contribution margin	41.00

Unit sales to breakeven = Fixed costs / Contribution margin per unit

= $8,640 / $41 = 211 sweatshirts

In total sales = 211 sweatshirts * $48 = $10,128