The Shirt Works sells a large variety of tee shirts and sweatshirts. Steve Hoope

Question

The Shirt Works sells a large variety of tee shirts and sweatshirts. Steve Hooper, the owner, is thinking of expanding his sales by hiring high school students, on a commission basis, to sell sweatshirts bearing the name and mascot of the local high school. These sweatshirts would have to be ordered from the manufacturer six weeks in advance, and they could not be returned because of the unique printing required. The sweatshirts would cost Hooper $19.00 each with a minimum order of 200 sweatshirts. Any additional sweatshirts would have to be ordered in increments of 50. Since Hooper’s plan would not require any additional facilities, the only costs associated with the project would be the costs of the sweatshirts and the costs of the sales commissions. The selling price of the sweatshirts would be $38.00 each. Hooper would pay the students a commission of $7.00 for each shirt sold. 1) To make the project worthwhile, Hooper would require a $9,000 profit for the first three months of the venture. What level of unit sales and dollar sales would be required to reach this target net operating income? 2) Assume that the venture is undertaken and an order is placed for 200 sweatshirts. What would be Hooper’s break-even point in unit sales and in dollar sales?

Explanation / Answer

Answer 1. Calculation of Contribution per Shirt Amount SP per shirt $38 Less: Variable Costs Cost of Shirt $19 Sales Comm. To Student $7 Total variable Costs $26 Contribution per Shirt $12 Answer 1. Break Even point = Fixed Cost + Targeted Profit / Contribution Per Unit Break Even point = $9000 / $12 = 750 Units Break Even point in $ = 750 Units X $38 = $28500 Answer 2. No. of T shirts Ordered 200 Cost of Shirts $19 Total Costs $3,800 Since the shirts cannot be returned, cost of shirts will be the fixed cost for the Shirt Works so, Contribution per shirt = $38 - $7 = $31 per shirt Break Even point = $3800 (Fixed Cost) / $31 (Contibtution per Unit) = 122.58 or 123 Units Break Even point in $ = 123 Units X $38 = $4674

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