Question

Jeans Co. sells blue jeans wholesale to major retailers across the country. Each pair of jeans has a selling price of $30 with $20 in variable costs of goods sold. The company has fixed manufacturing costs of $1,150,000 and fixed marketing costs of $250,000. Sales commissions are paid to the wholesale sales reps at 10​% of revenues. The company has an income tax rate of 25​%

1.	How many jeans must Just for Kids Just for Kids sell in order to break​ even?
2.	How many jeans must the company sell in order to​ reach:
	a.	a target operating income of $420,000​?
	b.	a net income of $420,000​?
3.	How many jeans would Just for Kids Just for Kids have to sell to earn the net income in requirement 2b if​ (Consider each requirement​ independently.)
	a.	the contribution margin per unit increases by 15​%.
	b.	the selling price is increased to $32.00.
	c.	the company outsources manufacturing to an overseas company increasing variable costs per unit by $2.00 and saving 80​% of fixed manufacturing costs.

Answer 1

1
CMU = $30-$20-(0.10 × $30) = $7
Break even units
Fixed Cost / Contribution per unit	200000
2(a)
Units (Q) = (Fixed Cost + Total operating income) / Contribution per unit
(1400000+420000)/7	260000
2(b)
Target operating income = Target net income/1-tax rate
420,000/1-0.25	560000
jeans must the company sell
Fixed costs + Target operating income / (Contribution per unit)
1400000+560000 / 7	280000
3(a)
Contribution margin per unit increases by 15%
Contribution margin per unit = 7*1.15	8.05
3(b)
Quantity of output unitsrequired to be sold
Fixed costs + Target operating income / Contribution per unit
1400000+560000 / 8.05	243478
3(c)
Increase variable costs by $2 per unit and decrease fixed manufacturing costs by 80%.
Contribution margin per unit = (30-22)-0.1*30 =	5
Fixed manufacturing costs
(1 – 0.8) ×1,150,000	230000
Fixed marketing costs =250,000
Total fixed costs = 230000+250000	480000
Quantity of output units required to be sold
Fixed costs + Target operating income / Contribution margin per unit
480000+420,000​ / 5	180000