Tuff Kids Jeans Co. sells blue jeans wholesale to major retailers across the cou

Question

Tuff Kids Jeans Co. sells blue jeans wholesale to major retailers across the country. Each pair of jeans has a selling price of $30 with $21 in variable costs of goods sold. The company has fixed manufacturing costs of $1,200,000 and fixed marketing costs of $300,000. Sales commissions are paid to the wholesale sales reps at 5% of revenues. The company has an income tax rate of 25%.

1. How many jeans must Tuff Kids sell in order to break even?

2. How many jeans must he company sell in order to reach:

a. a taret operating income of $450,000?

b. a net income of $450,000?

3. How many jeans would TuffKids have to sell to earn the net income in part 2b if (consider each requirement independently).

a. The contribution margin per unit increases by 10%

b. The selling price is increased to $32.50.

c. The company outsources manufacturing to an overseas company increasing variable costs per unit by $2.00 and saving 60% of fixed manufacturing costs.

Explanation / Answer

Variable Cost per jeans $21 Fixed manufacturing cost $1,200,000 Fixed marketing cost $300,000 Sales Commisions 5% of sales Sales Commisions variable 1.5 Income Tax rate 25% 1) breakeven in units=Fixed Cost/Selling Price-variable cost 1500000/30-22.5 200000 jeans 2) required sales in units=Fixed Cost+Targeted Income/Contribution margin per unit a)(1500000+450000)/.25 7800000 jeans 2) required sales in units=Fixed Cost+Targeted Income+Income Taxexpense/Contribution margin per unit b) (1500000+450000+150000)/.25 8400000 jeans Contribution margin per unit=30-22.5/30 0.25 Income tax 450000/0.75*0.25 $150,000 If income is $600000 than income tax is $150000 and net income 450000 Ans 3 a) (1500000+450000+150000)/(.25*1.1) 7636364 jeans b) (1500000+450000+150000)/.31 6774194 jeans Contribution margin per unit=32.5-22.5/32.5 0.31

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