Question

Big Al’s Athletic Apparel annually sells 20,000 University of 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 UF 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 (10 points each)

Consumer Price	$25
Dick’s Purchase Price	$15
Dick’s Margin	$10
Distributor Purchase Price	$12.5
Distributor Margin	$2.50
Big Al’s Gross Margin ($)	$7.50
Big Al’s Gross Margin (%)	60%
Big Al’s Contribution Margin ($)	$11.50
Big Al’s Contribution Margin (%)	92%

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 $2.50, how additional units would it need to break even?

Multiple Choice (Mark the correct answer 10 points each)

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

Big Al's new contribution margin after the price discount is: $9, hence answer---None of these

New contribution Margin is: $9     

Fixed overhead: $80,000 (20,000x$4)

Fixed overhead per T shirt=(Contribution margin- gross margin)=($11.50-$7.50)=$4

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

b. revised contribution per T-shirt (a-b) = $9 ($11.50-$2.50) ie. reduction selling price per Tshirt=$2.50

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

x.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=6957 T shirts

y.Contribution after the  revision of selling price per T-shirt=$9 and Break even Units=Fixed cost/Contribution per T shirt=$80000/$9=8889  T shirts

z .Incremental number of units or T shirt=(x-y)=8889-6957=1932

Please come back if any clarification required