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 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 Hooper $8 each with a minimum order of 75 sweatshirts. Any additional sweatshirts would have to be ordered in increments of 75.

Since 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 $13.50 each. Hooper would pay the students a commission of $1.50 for each shirt sold.

Required:

1. What level of unit sales and dollar sales is needed to attain a target profit of $1,200?

2. Assume that Hooper places an initial order for 75 sweatshirts. What is his break-even point in unit sales and dollar sales?

Explanation / Answer

Ans 1 Sales price $13.50 Less: v ariable cost Cost of purchase $8 Commission 1.5 Total variable cost $9.5 Contribution Margin $4.00 Units required for desired profit is Fixed cost+Target profit/CM (0+1200)/4 300 sweatshirt ans 2 Now initial order is for 75 shirts and this is fixed now as this is minium qty which it needs to place so now the contribution margin is (13.5-1.5)=$12 Units sales to Break even 50 sweatshirt Fixed cost/CM (75*8)/12 $ value for Break even 50*13.5 $675

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