Question

Anna Cox currently manufactures and sells jeans from a small inner-city laneway factory in Melbourne. Each pair of jeans is currently sold for $100. Fixed costs currently total $60,000 per month. The variable costs associated with producing each pair consist of:

Materials	$15.00
Labour	$10.00

Required

1. How many pairs of jeans would Anna Cox currently need to sell per month for the business to breakeven?
2. Anna Cox is currently considering a plan to expand the firm’s operations. The expansion would increase the firm’s fixed costs by $40,000 per month. Through her firm’s increased buying power, Anna will be able to reduce the variable materials cost of her jeans by $2.50/pair. If the expansion goes ahead, how many pairs of Jeans would Anna need to sell to earn a target profit of $25,000 per month? Beyond these financial considerations, what other factors should Anna consider in evaluating the desirability of this proposal?

Answer 1

Answer a:

Let the number of units to be sold be X.

Now, as per the given information,

Particulars	Amount($)
Selling price	$100
Less: Variable Cost:
Material	$15
Labour	$10
Contribution	$75

Now, Contribution = $75 * X units= $ 75 X.

FIxed cost=$60000

In order to be breakeven,

75X= 60000;

or, X= 60000/75

or, X=800

Answer a: 800 units should be sold in order to be breakeven.

Answer b:

Anna Cox is considering a plan to expand the firm's operations.

The firm's fixed cost will increase by $40000 per month.

The firm's material cost will reduce by $2.50/ pair.

The new variable cost would be:

($25-$2.50)= $22.50.

Target is to earn a profit of $25000 per month.

Particulars	Amount($)	Units
Selling price	100	X
Less: Variable Cost:	22.5	X
Contribution	77.5	X
Less: Fixed cost	100000
Profit	25000

Now the formula shall be:

Contribution - Fixed cost=Profit

77.5X-100000= 25000

or, 77.5X= 125000

or, X= 125000/77.5

or, X= 1613

Answer: The firm should sell 1613 units to achieve a profit of $25000 per month.

Beyond these financial considerations, Anna should also consider the long term impact of the project on the expansion of operations. Also, it should consider the market factors affecting the operations.

Hence, above are the calculations for evaluating the desirability of the project.