F Company manufactures and sells T-shirts. Last year, the shirts sold for $7.50

Question

F Company manufactures and sells T-shirts. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income last year was $5,040. F Company’s expectation for the coming year include the following:

-        The selling price of the T-shirts will be $9.00

-        Variable cost to manufacture will increase by one-third

-        Fixed costs will increase by 10%

-        The income tax rate of 40% will be unchanged

The number of T-shirts that must be sold to break even in the coming year is ?

Explanation / Answer

At breakeven contribution margin=Fixed Cost

contribution margin=Sales-Variable costs

Hence at breakeven;contribution margin=(7.5-2.25)*20000=$105000

Hence Fixed cost last year=$105000.

Now:

Sales=$9.00

Variable cost=2.25+($2.25*1/3)=$3

Hence contribution margin=(9-3)=$6 per unit

Fixed costs=(105000*1.1)=$115500

Hence units to be sold at breakeven in the coming year=Fixed cost/contribution margin

=(115500/6)

which is equal to

=19250 units.

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