Question

Speedy Dry Cleaning, like many dry cleaners, has a standard offer for dress shirts. If you drop your shirt off by noon, they will have it back the next day for a price of $3.50 per shirt. Because they offer the fast service, they have special contracts with their cleaning suppliers just for the shirt service. They pay $1.50 per shirt, plus a weekly fee of $80.00.

1. How many shirts does Speedy need to dry clean per week in order to break even?

2. For the past year, Speedy has averaged 50 shirts per week. How much profit are they making on shirts each week?

3. A competitor in Speedy’s market just started offering next-day shirt service for $3.00 a shirt. Speedy is feeling pressure to lower their price to $3.00 to stay competitive. If Speedy lowers their price to $3.00, and their average unit sales continue to be 50 shirts per week, what will their profit be?

Answer 1

As per the question

Price per shirt = $3.50

Variable cost per shirt = $1.50

Fixed Cost (weekly fees) = $80

a. What is the break even number of shirts?

Calculate contribution per shirt

Contribution = Sales price per unit – Variable cost per unit

Contribution = $3.50 - $1.50 = $2

Break even units = Fixed Cost ÷ Contribution per unit

Break even units = $80 ÷ $2 = 40 shirts

Break even number of shirts = 40

2. If the average number of shirts per week is 50, what is the profit?

Profit = Total Revenue – Total Cost

Total revenue = Price * Number of shirts = $3.50*50 = $175

Total Cost = FC + Variable cost = $80 + (50*$1.50) = $155

Profit = $175 - $155 = $20

It can be also calculated by the following method

Contribution per unit = $2

Contribution for 50 units = 50*$2 = $100

Contribution = FC + Profit

$100 = $80 + Profit

Profit = $20

3. If the price lowered to $3.00 (instead of $3.50) and the sales is 50 shirts, what is the new profit?

Profit = Total Revenue – Total Cost

Total revenue = Price * Number of shirts = $3.00*50 = $150

Total Cost = FC + Variable cost = $80 + (50*$1.50) = $155

Profit = $150 - $155 = -$5 (loss)

If the price decreased to $3.00 instead of $3.50, there will be a loss of $5.00.