Question

Question text

Glory Shirts Co. sells shirts wholesale to major retailers across Europe. Each shirt has a selling price of $80 with $56 in variable costs of goods sold. The company has fixed manufacturing costs of $1,700,000 and fixed marketing costs of $550,000. Sales commissions are paid to the wholesale sales reps at 10% of revenues. The company has an income tax rate of 30%.

Required:

1.    How many shirts must Glory sell in order to break even?      

2.    How many shirts must it sell in order to reach?          

a)      A target operating income of $1,000,000?          

b)      A net income of $500,000?

3.    How many shirts would Glory have to sell to earn the same net income of 500,000 if the contribution margin per unit increases by 20% and simultaneously the fixed manufacturing costs increases 10%.

Answer 1

		Old	New
	Fixed Manufacturing Cost	1,700,000
	Fixed Marketing Cost	550,000
	Total Fixed Cost	2,250,000	2,475,000
	Total Selling Price per unit	80
	Less: Sales Commission @10%	8
	Less: Variable Cost	56
	Gross Margin	16	19.20
	Tax @30%	5	6
	Net Income	11	13
1	Number of Shirts to be sold for break even	140625	Total Fixed Cost/ Gross Margin
2 (a)	Number of Shirts to be sold for operating income of 1 million	203125	(Operating Income required/ Gross Margin)+ No. of shirts at Break Even
2(b)	Number of Shirts to be sold for Net income of 500,000	185,267.86	500,000 is after tax income and before tax income would be (500,000/0.7 i.e. 714,286) which will be operating income and will calculate as did in 2(a)
3	Number of Shirts to be Sold:
	500,000 is after tax income and before tax income would be (500,000/0.7 i.e. 714,286)
	Fixed Cost and Gross margin changed hence new Break even is	128906.25
	Additiona Shirts to be sold for net income	37,202.40
	Total Shirts to be sold	166,108.65