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.
Sales for the coming year are expected to exceed last year's by 1,000 units. If this occurs, Dorcan's sales volume in the coming year will be:
A) 22,600 units.
B) 21,960 units.
C) 23,400 units.
D) 21,000 units.

Question

Quizplus · Accepted Answer

The correct answer is A.The contribution margin per unit is $9 - $2.25 = $6.75. The break-even point is 20,000 units. The sales volume in the coming year will be 20,000 + 1,000 = 21,000 units. The fixed costs will increase by 10%, so the new fixed costs will be $5,040 / (1 - 0.40) * 1.10 = $9,000. The contribution margin will be $6.75 * 21,000 = $141,750. The net income will be $141,750 - $9,000 = $132,750. The sales volume in the coming year will be $132,750 / $6.75 = 22,600 units.

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