Jeans Co. sells blue jeans wholesale to major retailers across the country. Each
ID: 2333630 • Letter: J
Question
Jeans Co. sells blue jeans wholesale to major retailers across the country. Each pair of jeans has a selling price of $30 with $20 in variable costs of goods sold. The company has fixed manufacturing costs of $1,150,000 and fixed marketing costs of $250,000. Sales commissions are paid to the wholesale sales reps at 10% of revenues. The company has an income tax rate of 25%
1.
How many jeans must Just for Kids Just for Kids
sell in order to break even?
2.
How many jeans must the company sell in order to reach:
a.
a target operating income of $420,000?
b.
a net income of $420,000?
3.
How many jeans would Just for Kids Just for Kids
have to sell to earn the net income in requirement 2b if (Consider each requirement independently.)
a.
the contribution margin per unit increases by 15%.
b.
the selling price is increased to $32.00.
c.
the company outsources manufacturing to an overseas company increasing variable costs per unit by $2.00 and saving 80% of fixed manufacturing costs.
1.
How many jeans must Just for Kids Just for Kids
sell in order to break even?
2.
How many jeans must the company sell in order to reach:
a.
a target operating income of $420,000?
b.
a net income of $420,000?
3.
How many jeans would Just for Kids Just for Kids
have to sell to earn the net income in requirement 2b if (Consider each requirement independently.)
a.
the contribution margin per unit increases by 15%.
b.
the selling price is increased to $32.00.
c.
the company outsources manufacturing to an overseas company increasing variable costs per unit by $2.00 and saving 80% of fixed manufacturing costs.
Explanation / Answer
1 CMU = $30-$20-(0.10 × $30) = $7 Break even units Fixed Cost / Contribution per unit 200000 2(a) Units (Q) = (Fixed Cost + Total operating income) / Contribution per unit (1400000+420000)/7 260000 2(b) Target operating income = Target net income/1-tax rate 420,000/1-0.25 560000 jeans must the company sell Fixed costs + Target operating income / (Contribution per unit) 1400000+560000 / 7 280000 3(a) Contribution margin per unit increases by 15% Contribution margin per unit = 7*1.15 8.05 3(b) Quantity of output unitsrequired to be sold Fixed costs + Target operating income / Contribution per unit 1400000+560000 / 8.05 243478 3(c) Increase variable costs by $2 per unit and decrease fixed manufacturing costs by 80%. Contribution margin per unit = (30-22)-0.1*30 = 5 Fixed manufacturing costs (1 – 0.8) ×1,150,000 230000 Fixed marketing costs =250,000 Total fixed costs = 230000+250000 480000 Quantity of output units required to be sold Fixed costs + Target operating income / Contribution margin per unit 480000+420,000 / 5 180000
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