Fixed & Variable Costs Thanks! Goose down is used in a wide variety of products,

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Fixed & Variable Costs

Thanks!

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, that price per pound had risen to about $23 per pound^1. 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 the 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 manufacturers are raising the price of their products to counteract the increasing cost of down. Is the cost of down a fixed cost or a variable cost for a jacket manufacturer such as Lands' End? If the cost of down increases, what happens to the breakeven point for a down-filled jacket product line at Lands' End? What is the percentage increase in the cost of down per pound from 2010 to 2012 at Lands' End? Would you expect the breakeven units to change by this same percentage? Why or why not? If down increases by a certain percentage, will the selling price of a down-filled jacket need to change by that same percentage to maintain the same profit margin? Explain.

Explanation / Answer

Ans 1. Cost of down is used as a material so it is a variable cost.

2. If the cost of down is increases then its contribution per unit will decrease and break even point will increase to cover the fixed cost.

3. price in oct 2010 = $13 per pound

   Price in oct 2012 = $23 per pound

Increase in price = 23-13 = $10

(10/13)*100 = 76.92%

No, break even units change will be in different % because there is also a chance of change in sales price or fixed cost.

4. No, since % increase in cost of down is assessed using base of cost of down in oct 10 on the other hand sales price base will be different for same %. Like

Suppose sale price of final product is 30 in oct 2010 and cost is 13, profit margin is 30-13 = 17

Now if the cost of down is increased to 23, by increasing 10 in cost which is 76.92% of cost and if by the same figure sale price is increased it comes to 10/30 = 33.33% only

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