3-23 CVP analysis, sensitivity analysis. Tuff Kids Jeans Co. sells blue jeans wh
ID: 2423024 • Letter: 3
Question
3-23 CVP analysis, sensitivity analysis. Tuff Kids Jeans Co. sells blue jeans wholesale to major retailers across the country. Each pair of jeans has a selling price of $30 with $21 in variable costs of goods sold. The company has fixed manufacturing costs of $1,200,000 and fixed marketing costs of $300,000. Sales commissions are paid to the wholesale sales reps at 5% of revenues. The company has an income tax rate of 25%.
How many jeans must Tuff Kids sell in order to break even?
How many jeans must the company sell in order to reach:
a target operating income of $450,000?
a net income of $450,000?
How many jeans would TuffKids have to sell to earn the net income in part 2b if (consider each requirement independently).
The contribution margin per unit increases by 10%
The selling price is increased to $32.50
The company outsources manufacturing to an overseas company increasing variable costs per unit by $2.00 and saving 60% of fixed manufacturing costs.
Explanation / Answer
Contribution per unit = (30-21) - 30x5% = 7.50
Break even jeans = $1500000/7.50
= 200000
Jeans to be sold to earn operating income of 450000 = (1500000 + 450000)/7.50
= 260000
To earn 450000 net income or 450000/75% i.e. 600000operating income jeans to be sold
= (1500000 + 600000)/7.50
= 280000
Revised contribution = (32.50 - 23) - 32.50 x 5%
= 7.875
Revised FC = 1200000 x 40% + 300000
= 780000
Jeans to be sold = (780000 + 600000)/7.875
= 175238
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