Donnelly 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:

Question

Quizplus · Accepted Answer

The contribution margin ratio last year was (7.50 - 2.25) / 7.50 = 0.70. To maintain the same ratio, the new selling price should be (new variable cost) / (1 - 0.70). The new variable cost is 2.25 * 1.33 = 3.00. Therefore, the selling price should be 3.00 / 0.30 = 10.00.

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