Explanation Potential venture to be assessed with all the discussion question, producing and selling of custom T-shirts venture can be taken. This venture will include all the component to analyze under each prescribed scenario as described under different indications. 1. Engaging in producing and selling custom T-shirts targeting all the age groups of the customer. The product will be launched in company’s own outlet first and then it will go to the different distributors in other cities. The venture will be on small scale first. The selling price for first five years is fixed at $10 increase every year estimating at $20, $30, $40, $50, & $60 respectively. Sales units to be produced and sold for first five years will be 150, 200, 210, 300, & 400 T-shirts. 2. Direct materials (cloth, strings, dyeing colors, etc.) & direct labor together will be $15, $20, $25, $30, & $35 per T-shirt for five years. 3. Equipment required for weaving, dyeing, & printings will amount to $20,000 with the estimated life of 10 years. 4. Factory rent will be $250 and utilities will amount to $100. Selling and administrative expenses will amount to $350 per year. 5. Direct materials and direct labor will be variable expenses whereas factory rent, utilities, and administrative and selling expenses will be fixed expenses. 6. Computing breakeven for first five years in units. Fixed expenses will be $700 whereas. Year 1: Computing contribution margin per unit: Contribution margin per unit = Selling price per unit - variable expenses per unit = $20 - $15 = $5 Computing required units to be sold to breakeven: Sales in units = Fixed expenses + operating income Contribution margin per unit = $ 700 + $0 $ 5 = 140 T-shirts Year 2: Computing contribution margin per unit: Contribution margin per unit = Selling price per unit - variable expenses per unit = $30 - $20 = $10 Computing required units to be sold to breakeven: Sales in units = Fixed expenses + operating income Contribution margin per unit = $ 700 + $0 $ 10 = 70 T-shirts Year 3: Computing contribution margin per unit: Contribution margin per unit = Selling price per unit - variable expenses per unit = $40 - $20 = $20 Computing required units to be sold to breakeven: Sales in units = Fixed expenses + operating income Contribution margin per unit = $ 700 + $0 $ 20 = 35 T-shirts Year 4: Computing contribution margin per unit: Contribution margin per unit = Selling price per unit - variable expenses per unit = $50 - $25 = $25 Computing required units to be sold to breakeven: Sales in units = Fixed expenses + operating income Contribution margin per unit = $ 700 + $0 $ 25 = 28 T-shirts Year 5: Computing contribution margin per unit: Contribution margin per unit = Selling price per unit - variable expenses per unit = $60 - $30 = $30 Computing required units to be sold to breakeven: Sales in units = Fixed expenses + operating income Contribution margin per unit = $ 700 + $0 $ 30 = 2 T-shirts (rounded) 7

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ISBN: 9780134067254

Author: Braun

Publisher: PEARSON

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Chapter 7, Problem 7.75ACT

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To apply: The concept of cost-volume-profit analysis to the hypothecated potential venture.

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Chapter 7, Problem 7.74ACT

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