2. Since an order has been placed, there is now a “fixed” cost associated
with the purchase price of the sweatshirts (i.e., the sweatshirts can’t be
returned). For example, an order of 75 sweatshirts requires a “fixed”
cost (investment) of $600 (75 sweatshirts × $8.00 per sweatshirt =
$600). The variable cost drops to only $1.50 per sweatshirt, and the
new contribution margin per sweatshirt becomes:
Selling price ... $13.50
Less variable expenses (commissions only)... 1.50
Contribution margin... $12.00
Since the “fixed” cost of $600 must be recovered before Mr. Hooper
shows any profit, the break-even computation would be:
Fixed expenses
Break-even point= in unit sales Unit contribution margin
= $600 =50 sweatshirts
$12.00 per sweatshirt
50 sweatshirts × $13.50 per sweatshirt = $675 in total sales
If a quantity other than 75 sweatshirts were ordered, the answer would
Problem 6-28 (60 minutes)
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