Atrium, a manufacturer of upscale designer tee-shirts, is considering launching
ID: 1193080 • Letter: A
Question
Atrium, a manufacturer of upscale designer tee-shirts, is considering launching an Internet operation to sell its product direct to consumers in addition to distributing through traditional bricks-and-mortar retail stores. Management believes an Internet presence should augment its retail operation. Atrium tee-shirts, made of 100% refined woven cotton, feature batik prints. The cost of producing an Atrium designer tee-shirt is $6.50 per shirt.
Internet: In selling tee-shirts on the Web, the company must hire a Web page architect to design the page and maintain it over the course of a year. The salary for a Web page architect is $60,000, including expenses and benefits. Shipping on Internet orders, which is to be included in the retail price of the tee-shirts, is estimated to be $4.20 per shirt.
Retail store distribution: A retail chain has proposed to carry Atrium tee-shirts for a year in exchange for a 35% dealer margin. Additional in-store promotion and a local print advertising campaign for a year will cost Atrium $80,000.
Based on the above information, answer the following questions. Please Show Your Calculations.
1a. If Atrium can sell 10,000 tee-shirts from its Web page, what’s the break-even price?
1b. If Atrium tee-shirts sell for $32 at the retail stores, how many tee-shirts must Atrium sell to break even?
Explanation / Answer
The cost of producing an Atrium designer tee-shirt is $6.50 per shirt.
For break even price, total revenue from tee shirts (TR) = Total cost of production (TC)
Where TR = p x q, q = 10,000
1a. 10,000 x p = (6.50 x 10,000) + (4.20 x 10,000) + 60,000
Solving for p, we get p = $70.70
1b. Assuming the dealer margin is not included, total revenue = Q x $32 x 1.35.
Q x $32 x 1.35 = (6.50 x 10,000) + 80,000
Q = 3433 (approx.)
If p = $32 already includes 35% dealer margin then Q x $32 = (6.50 x 10,000) + 80,000
i.e. Q = 4531(approx.)
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