Givarz Corporation manufactures and sells T-shirts imprinted with college names

Question

Givarz 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 net income last year was $5,040. Givarz's expectations for the coming year include the following: The sales price of the T-shirts will be $9    Fixed costs will increase by 10% Variable costs to manufacture will increase by one-third Income tax rate of 40% will be unchanged 7. The selling price that would maintain the same contribution margin ratio as last year is:

a. $8.25

b. $9.00

c. $9.75

d. $10.00

3
8. If Givarz Corporation wishes to earn $22,500 in net income for the coming year, the company sales volume in dollars must be:

a. $213,750

b. $207,000

c. $229,500

d. $257,625

Explanation / Answer

First we shall find out the fixed cost

Break even units = Fixed cost / (Selling price - Variable cost)

20000 = Fixed cost / ($7.5 - $2.25)

Fixed cost = 20000 * $5.25

Fixed cost = $105000

The present contribution margin = Fixed cost + Net Income before tax

= $105000 + $5040/60% = $113400

Revised variable cost = $2.25 + ($2.25*1/3) = $3

Contribution margin ratio = ($7.5 - $2.25) / $7.5 * 100 = 70%

This means variable cost would be 30% of selling price

Selling price = $3 / 30% = $10

Option d is correct

Revised contribution margin = Fixed cost + Net Income before tax

= ($105000+10%*105000) + $22500/60%

= $115500 + $37500 = $153000

Sales volume for this contribution = $153000 / ($9 - $3) = 25500 units

Sales in dollars = 25500 * $9 = $229500

Option c is correct

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