CVP analysis, sensitivity analysis. Tuff Kids Jeans Co. sells blue jeans wholesa
ID: 2492752 • Letter: C
Question
CVP analysis, sensitivity analysis. 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%. How many jeans must Tuff Kids sell in order to break even? How many jeans must the company sell in order to reach: a target operating income of $450, 000? a net income of $450, 000? How many jeans would TuffKids have to sell to earn the net income in part 2b if (consider each requirement independently) The contribution margin per unit increases by 10% The selling price is increased to $32.50 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
1 calculation of Break Even Point Break Even Point = Fixed Cost / Contribution Per Unit Fixed Cost = 1,200,000 + 300,000 = $1,500,000 Contribution Per Unit = Selling Price Per Unit - Variable Cost Per Unit Selling Price Per Unit = $30 Variable Cost Per Unit = $21 Variable Sales Commission = 30 x 5% = $1.50 Contribution Per Unit = 30 - 21 - 1.5 = $7.50 Break Even Point in Units = 1,500,000 / 7.50 = 200,000 Units 2 a Jeans required to be sold for operating income of $450,000 Target Operating Income + Fixed Cost / Contribution per Unit Jeans required to be sold = 450,000 + 1,500,000 / 7.50 = 260,000 Jeans b Jeans required to be sold for Net income of $450,000 Jeans Required to be sold for Break Even = 200,000 Net Income Per Jeans after Break Even = 7.5 x (1 - 0.25) = $5.625 Jeans required to be sold for Net income of $450,000: 200,000 + 450,000 / 5.625 = 280,000 Jeans 3 a calculation of number pairs to sell when contribution margin per unit increases by 10% to earn net income of $ 450000 are target net income = Fixed Costs + Operating income contribution Margin per Unit substitute , S1,500,000 fixed costs, $600,000 target operating income and $7.5 + ($7.5 x 10%) for contribution margin per unit target net income = 15000000 + 600000 8.25 254545 jeans b compute number pairs to sell when the selling price increases to 32.50 to earn net income of $450,000 are target net income = Fixed Costs + Operating income contribution Margin per Unit substitute, S 1,500,000 for fixed costs, $ 600,000 target operating income and $32.50 - ($21 + ($32.50x5%)) for contribution margin per unit target net income = 15000000 + 600000 9.875 212658 jeans