Question

A small clothing company plans to sell a new line of shirts. The selling price will be $35 per shirt. The labor costs will be $5 per shirt. The cost of materials will be $10 per shirt. The administrative costs of operating the company are estimated to be $60,000 annually and the sales and marketing expenses are $20,000 a year. How many shirts it has to sell in order to break-even?

Answer 1

Answer:

The correct answer is 4,000 shirts.

Explanation:

According to the scenario, computation of the given data are as follows:

Selling price = $35

Labor cost = $5

Cost of material = $10

So, Contribution margin amount = $35 - $5 - $10 = $20

And fixed cost = $60,000 + $20,000 = $80,000

So, we can calculate the breakeven units by using following formula:

Breakeven units = Fixed cost ÷ Contribution margin

= $80,000 ÷ $20

= 4,000 shirts