Question

Shirts-R-Us sells blouses in Florida. Blouses are imported from Pakistan and sold to customers in their stores. Salespeople are paid a base salary and a commission of $14 on each blouse they sell. The invoice cost of the blouse to the company is $36 per blouse. In addition, Shirts-R-Us pays rent of $160,000 a year, salaries total $140,000 a year and advertising is $300,000 a year. The blouses are sold for $80 each. The breakdown of the costs and revenues are given in the table. Revenues $80 per blouse Variable Costs Invoice cost $36 Commission $14 Fixed Costs Rent $160,000 Advertising $300,000 Salaries $140,000 a) Compute the breakeven point in units and dollars for Shirts-R-Us. b) Suppose that the company sells 18,500 blouses for the year. What price would Shirts-R-Us have to charge in order to breakeven? c) Suppose that Shirts-R-Us decides to increase salaries by $214,000 and eliminates the commission on sales. What is the new breakeven point in units and dollars?

Answer 1

Req A:
Selling price per unit: $ 80 per unit
Variable cost per unit: $ 36++14 = $50 per unit
Contribution margin per unit: Selling price - Variable cost per unit
		($ 80 - 50) = $30 per unit
Total Fixed cost:
Salaries		140000
Rent		160000
Advertisement		300000
Total Fixed cost:		600,000
CM ratio: Contribution per unit/ Sselling price = $ 30 / 80 *100 = 37.5%
Break even in units: Fixed cost / Cm per unit
		($ 600,000 / 30) = 20,000 units
Break even in $: Fixed cost / CM ratio
	($ 600,000 /37.5%) = $1600,000
Req b:
Sales units: 18,500 units
To be at break even, Total contribution from 18500 units = $ 600,000 (i.e. fixed costt0
Required contribution per unit: $ 600,000 /18,500 units = $ 32.43 per unit
Selling price to be at break even = Variable cost i.e. $ 50 + Contribution i.e. 32.43 = $ 82.43 per unit
Req C:
Revised Variable cost per unit: $ 36 per unit
Revised fixed cost: 600,000 +214,000 = $ 814,000
Revised contribution per unit : 80 - 36 = $ 44 per unit
Revised CM ratio : $ 44 / 80 *100 = 55%
Revised break even in units : Fixed cost / Contribution per unit = $ 814,000 /44 = 18500 units
Revised break even in $: Fixed cost / CM ratio = $ 814,000 /55% = $1480,000