Question

Cathy's Towels sells three items (which it purchases from a supplier): bath towels, hand towels, and washcloths in a 4:3:2 mix (thus, a batch of 9 towels has 4 bath towels, 3 hand towels, and 2 washcloths). Each bath towel sells for $10 and costs $4, each hand towel sells for $5 and costs $2; and each washcloth sells for $2.50 and costs $1. The shop's annual fixed expenses are $324,000, and the income tax rate, t, is 40%. How many bath towels must the firm sell at the breakeven point

Answer 1

Answer:

36,000 baths

Explanation:

The computation of the bath towels that must the firm would sell at the break even point is shown below:

But before that the contribution margin per unit is

Particulars        Bath towels   Hand towels  Wash towels

Selling price      $10                  $5                  $2.5

Less: variable cost $4              $2                  $1

Contribution margin $6           $3                  $1.50

No of items in batch  4             3                    2

Contribution margin per unit $24   $9        $3

Now the number of baths would be

= $324,000 ÷ ($24 + $9 + $3) × 4

= 36,000 baths