Question

In: Finance

London Yarn is developing a new line of women's causal dresses. Estimated overhead costs are $400,000...

London Yarn is developing a new line of women's causal dresses. Estimated overhead costs are $400,000 while each dress will cost $10 in labor and materials. They want to know if they should continue with this project. Show all calculations.

(25 pts) If the price is set at $90, how many dresses do they need to sell to breakeven?

(25 pts) If the price is set at $90, how many dresses do they need to sell to earn a target profit of 10%?

(25 pts) Given a price of $90, how many dresses must they sell to earn a target profit of 10% plus cover a $18,000 advertising budget?

(25 pts) If they sell 5,500 dresses, what price should they charge (maintaining the 10% target profit and advertising)?

Expert Solution

a).Breakeven sales quantity

=Fixed Cost / Contribution per unit (dress)

Calculation of Contribution per unit and Breakeven Sales quantity is as follows:

Particulars	Amount ($)
Sale price	90
Less: Variable Cost (Labour & Material)	(10)
Contribution per unit	80
Fixed Costs (overhead costs)	400,000

Breakeven Sales quantity=400,000/80	5000 dresses

b.sales quantity of dress to earn target profit of 10%

Target profit is 10%

Let X be the no.of dress to be sold to earn target profit of 10%

Then total target profit will be 9x(90x*10%)

Desired/Target sales quantity

=(Fixed Cost+Target Profit)/contribution per unit

Calculation of desired/Target sales quantity

x=(400,000+9x)/80

80x=400,000+9x

71x=400,000

x= 400,000/71

x= 5633.80

x~5634 dress es

Target profit% at sales=5,634 dresses

Particulars	Amount ($)
Sales (5634*90)	507,060
Less : Variable Cost (10*5634)	(56,340)
Contribution	450720
Less: Fixed costs	(400,000)
Profit	50,720
Target profit %(profit/sales*100)	=50,720/507,060*100 =10%

C.no of dresses to be sold to earn target profit of 10% and cover $18,000 a advertising budget

As advertising budget is in nature of fixed cost, our fixed cost is increased by 18,000

So total fixed cost=overhead costs+advertising budget

=$400,000+$18,000

=$418,000

So, using formula (which was used in part b)

x= (418,000 +9x)/80

80x=418,000+9x

71x=418,000

X=418,000/71

X=5887.32

x~5888 dresses

Target profit% at sales=5888 dresses

Particulars	Amount ($)
Sales(5888*90)	529,920
Less: Variable Cost (5888*10)	(58,880)
contribution	471,040
Less: Fixed cost	(418,000)
Profit	53,040
Target profit%(Profit/sale*100)	=53,040/529,920*100 =10.01%

d.if 5,500 dresses to be sold by maintaining Target Profit of10%and $18,000 advertising budget price to be charged is ??

Now, X be the price per dress

Now target profit will be =5,500*X*10%

=550X

So, using the same above formula

Desired/Target sales quantity

=(Fixed Costs+ Target Profit)/Contribution per unit

5,500=($418,000+$550X)/$(X-10)

5,500*$(X-10)=$418,000+$550X

$5,500X-$55,000=$418,000+$550X

$5,500X-$550X=$418,000+$55,000

$4,950X=$473,000

X=$473,000/$4950

X=$95.56

So Target profit at sales =5,500dress and sale price $95.56

Particulars	Amount ($)
Sales(5,500*95.56)	525,580
Less: Variable Cost	(55,000)
Contribution	470,580
Less:Fixed cost	(418,000)
Profit	52,580
Target profit%(profit/sale*100)	=52,580/525,580*100 =10%

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