Question

Dorcan 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: (CMA adapted)

The sales price of the T-shirts will be $9
Variable cost to manufacture will increase by one-third.
Fixed costs will increase by 10%
The income tax rate of 40% will be unchanged.

Based on a $10 selling price per unit,. the number of T-shirts Dorcan Corporation must sell to break-even in the coming year is:

(A) 16,500 units.
(B) 20,000 units.
(C) 22,000.
(D) 17,000 units.

Answer 1

Answer:

correct option is (A) 16,500 units.

Explanation:

given data

shirts sold = $7.50

variable cost  = $2.25

after tax net income = $5,040

selling price  =$10

solution

we get here first fixed cost that is

Break even sales units = Fixed costs ÷ Contribution per unit   .............1

put here value

20000 = $\frac{fixed \ cost }{7.50 -2.25}$

Fixed costs = $105000  

and

Fixed costs coming year will be

Fixed costs coming year =  ($105000 × 1.10)

Fixed costs coming year = $115500

and

Variable cost =  $2.25 + ($2.25 × $\frac{1}{3}$ )

Variable cost = $3

so that Contribution margin  will be

Contribution margin = Sales price - Variable cost ............2

Contribution margin = $10 - $3

Contribution margin = $7

and

break even sales units is

break even sales  = $\frac{115500}{7}$  

break even sales  = 16500 units

so correct option is (A) 16,500 units.