Donnelly Corporation manufactures and sells T-shirts imprinted with college name

Question

Donnelly Corporation manufactures and sells T-shirts imprinted with college names and slogans. 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 after-tax net income last year was $5,040. Donnelly's expectations for the coming year include the following:

•The sales price of the T-shirts will be $9. .

•Variable costs to manufacture each unit will increase by 33%. .

•Fixed costs will increase by 10%. .

•The income tax rate of 40% will be unchanged..

The number of T-shirts Donnelly Corporation must sell to break even in the coming year is:

Explanation / Answer

Existing Fixed costs
=================                      Per Unit        Total
Contribution ($7.50 - $2.25)          $5.25       
20,000 x $5.25                                               $105,000

Fixed costs = Contribution Marging                 $105,000
Revised Fixed costs $105,000 x 110%             $115,500

Revised contribution Margin
($9.00 - $2.25*1.33)            =        $6.00

BEP (in dollars) = $115,500 / $6.00 = 19,250 T-shirts

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