A T-shirt retailer is planning to sell 500 T-shirts for $20 each at the next Olympics. This will generate a contribution margin ratio of 70%. If this level of sales will signify breakeven for the T-shirt retailer's operations at the Olympics, what are the retailer's fixed costs associated with selling at the Olympics.

Question

Quizplus · Accepted Answer

First, we need to calculate the total contribution margin that the T-shirt retailer will earn from selling 500 T-shirts for $20 each:

Contribution Margin = Sales Price x Contribution Margin Ratio
Contribution Margin = $20 x 70%
Contribution Margin = $14

Total Contribution Margin = Contribution Margin x Number of Units Sold
Total Contribution Margin = $14 x 500
Total Contribution Margin = $7,000

Since the T-shirt retailer plans to sell 500 shirts to break even, we know that their total costs (fixed plus variable) will be equal to their total contribution margin of $7,000. We also know that the variable cost per T-shirt sold is $6 (since the contribution margin ratio is 70%, the variable cost ratio must be 30%, which means that variable cost is $6).

Total Cost = Fixed Cost + Variable Cost x Number of Units Sold
$7,000 = Fixed Cost + $6 x 500
$7,000 = Fixed Cost + $3,000
Fixed Cost = $7,000 - $3,000
Fixed Cost = $4,000

Therefore, the T-shirt retailer's fixed costs associated with selling at the Olympics are $4,000, so the best choice is C: $7,000.

A T-Shirt Retailer Is Planning to Sell 500 T-Shirts for $20