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26 August, 08:09

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?

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  1. 26 August, 08:47
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    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
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