The Shirt Works sells a large variety of tee shirts and sweatshirts. Steve Hoope

Question

The Shirt Works sells a large variety of tee shirts and sweatshirts. Steve Hooper, the owner, is thinking of expanding his sales by hiring local high school students, on a commission basis, to sell sweatshirts bearing the name and mascot of the local high school.


These sweatshirts would have to be ordered from the manufacturer six weeks in advance, and they could not be returned because of the unique printing required. The sweatshirts would cost Mr. Hooper $22.5 each with a minimum order of 320 sweatshirts. Any additional sweatshirts would have to be ordered in increments of 75.


Because Mr. Hooper's plan would not require any additional facilities, the only costs associated with the project would be the costs of the sweatshirts and the costs of the sales commissions. The selling price of the sweatshirts would be $45 each. Mr. Hooper would pay the students a commission of $9 for each shirt sold.

Requirement 1:

To make the project worthwhile, Mr. Hooper would require a $11,475 profit for the first three months of the venture. What level of sales in units and in dollars would be required to reach this target net operating income?

Requirement 2:

Assume that the venture is undertaken and an order is placed for 320 sweatshirts. What would be Mr. Hooper's break-even point in units and in sales dollars?

Explanation / Answer

Requirement 1: 920 shirts, $41,400 in sales Requirement 2: 850 shirts, $38,250 in sales No Fixed Costs Variable Costs = $22.50 + $9 = $31.50 each Sales Price = $45 Contribution Margin = $13.50 Minimum profit = $11,475 $11,475 = $13.50x x = 850 shirts Must purchase base 320 shirts, and in 75 increments afterwards 850 - 320 = 530 / 75 = 7.066 So 320 + 8 batches of 75 = 920 shirts 920 shirts, $41,400 in sales

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