Goose down is used in a wide variety of products, including jackets, bedding, an

Question

Goose down is used in a wide variety of products, including jackets, bedding, and pillows. In recent years, the cost of down has been increasing. For example, in October 2010, Lands' End, a retailer of clothing and bedding items, was paying about $13 for a pound of down in China. By October 2012, the price per pound had risen to about $23 per pound. The costs of other types and grades of down have increased similarly The cost of down has increased because of a few reasons. First of all, China is one of the major producers of down in the world. China's wealth has been increasing. As a result, more families are moving from farms to urban areas thereby reducing the number of families who are farming in addition, dietary preferences around the world are changing to more meat and fish over geese and ducks, decreasing potential revenue from raising geese On the demand side, the demand for down is increasing. The increasing popularity of down jackets from a fashion standpoint is driving most of the increase in demand for down. In prior decades, down was just used for specialized winter sports apparel for skiing and climbing. Now down is used in popular, general fashions Some companies are developing synthetic substitutes for down as they try to counteract the increasing costs of the down. In the meantime, companies such as Lands' End, North Face, and other garment manufactures are raising the price of their products to counteract the increasing cost of the down. REQUIREMENTS 1. Is the cost of the down a fixed or variable cost for a jacket manufacturer such as Lands' End? 2. If the cost of the down increases, what happens to the breakeven point for a down-filled 3. What is the percentage increase in the cost of down per pound from 2010 to 2012 at Lands' 4. If down increases by a certain percentage, will the selling price of a down-filled jacket need 5. Assume that a Lands' End down jacket selling for $100 uses 12 ounces of down. Further jacket product line at Lands' End? End? Would you expect the breakeven units to change by the same percentage? Why or why not? to change by that same percentage to maintain the same profit margin? Explairn assume that Lands' End has $250,000 of fixed costs related to the down jacket line and it other variable manufacturing costs (direct materials, direct labor, and manufacturing over head) total $60 per jacket. As stated in the story, the cost per pound was $13 and $23 in October 2010 and October 2012, respectively. Calculate the breakeven number of jackets both in October 2010 and October 2012. Do these breakeven numbers agree with you answers to prior questions? 6. Assume now the same set of facts as in Question #5 but that Lands' End raises the selling price of each jacket by $10 in October 2013. Does the contribution margin percentage remain the same? What is the new contribution margin ratio? 7. What is the new breakeven in units after October 2013 price increase?

Explanation / Answer

1. Cost is directly proportional & varies with quantity bought & also with quantity used in the items sold.It is a direct raw material used in the production of retail items sold by Lands' End. So,cost of down is a variable cost for Lands' End. 2. If the cost of the down increases,contribution (ie. Sale price-Variable costs) for that product decreases.No.of break-even point units   (Fixed costs/Contribution per unit),increases--ie. No.of units to be sold to cover the fixed costs ,increases. 3.   % increase in the cost of down per pound from 2010 to 2012=(23-13)/13=77% Break-even units increase by a far lesser % age ,as the fixed costs remain the same Example for Answer:3. 2010 2012 Change % S.P. 100 100 0% Cost 13 23 77% Contribution 87 77 -11% Fixed costs 50 50 0% Profit 37 27 -27% BEP=FC/Contn. 0.57 0.65 13% 4. No. It increases by a lesser margin as the fixed costs remain the same. Example for Answer:4. 2010 2012 Change % S.P. 100 107 7% Cost 20 25 25% Contribution 80 82 Contn.% 80% 77% FC 50 50 Profit 30 32 30% If x is the selling price, then, x-25-50=0.3X 0.7x=75 x=75/0.7 107 5 Oct. 2010 Oct.2012 Selling price of 1 Jacket 100 100 Less: Variable costs: Cost of down(13/16*12)& (23/16*12) 9.75 17.25 Other V.c. 60 60 Total variable costs 69.75 77.25 Contribution/Jacket 30.25 22.75 Break-even no.of jackets Fixed costs/Contn./jacket 250000/30.25= 250000/22.75= 8264 10989 YES. BE units increase with increase in variable costs 6 Oct. 2010 Oct.2012 Selling price of 1 Jacket 100 110 Less: Variable costs: Cost of down(13/16*12)& (23/16*12) 9.75 17.25 Other V.c. 60 60 Total variable costs 69.75 77.25 Contribution/Jacket 30.25 32.75 New contn. Margin ratio 30.25/100= 32.75/110= 30.25% 29.77% 7. Break-even no.of jackets Fixed costs/Contn./jacket 250000/30.25= 250000/32.75= 8264 7634 New break-even in 2013 7634

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