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.
The selling price that would maintain the same contribution margin ratio as last year is:
A) $9.00.
B) $8.25.
C) $10.00.
D) $9.50.

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.
The selling price that would maintain the same contribution margin ratio as last year is:
A) $9.00.
B) $8.25.
C) $10.00.
D) $9.50.

Quizplus · Accepted Answer

The contribution margin ratio last year was ($7.50 - $2.25) / $7.50 = 0.70. With a one-third increase in variable cost, the new variable cost is $2.25 * 1.33 = $3.00. To maintain the same contribution margin ratio, the selling price should be $3.00 / (1 - 0.70) = $10.00.

Dorcan Corporation Manufactures and Sells T-Shirts Imprinted with College Names