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 These sweatshirts wouid have to be ordered trom the manutacturer six weeks in advance, and they couid not be returned because of the unique printing required The sweatshirts would cost Hooper 517.00 each with a minimum order or 400 sweatshirts. Any additional sweatshirts would have to be ordered in increments of 50 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 $34.00 each. Hooper would pay the students a commission of 54.00 for each shirt sold. Required 1. To make the project worthwhile, Hooper would require a S11,050 pront for the first three months of the venture. What level of unit sales and dollar sales woukd be required to reach this target net operating income? (Do not round intermediate Sales leel in unit: sweatshirls Sales level ales level in 2. Assume that the venture is undertaken and an order is placed tor 400 sweatshirts. What would be Hooper's break-even point in unit sales and in dollar sales? (Round your intermediate calculations and final answers to the nearest whole number.) oven point in units Break even point in sales dollars sweatshirls

Explanation / Answer

1. Sales level in units 850 sweatshirts

Sales level in dollars $ 28,900 in total sales (850 x $34)

Contribution margin per sweatshirt = Selling price - Purchase cost -Commission = $ 34 - $17 - $4 = $13

As there is no fixed cost, the number of unit sales needed to yield the desired $11,050 in profits is:

= Target Profit / Unit Contribution Margin

= $ 11,050 / $ 13

= 850 sweatshirts

2. Break even point in units 227 sweatshirts

Break even point in sales dollars $ 7,718 (227 x $34)

Since the order is placed and cannot be returned, fixed costs of the order will be 400 x $17 = $ 6,800

Variable costs will be only $4 per unit.

Break even point in units = $ 6,800 / ($34 - $4) = 227 sweatshirts

  

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