Author Question: CVP analysis, sensitivity analysis. Tuff Kids Jeans Co. sells blue jeans wholesale to major ... (Read 346 times)

bobypop · **on:** Jul 6, 2018

CVP analysis, sensitivity analysis.

Tuff Kids Jeans Co. sells blue jeans wholesale to major retailers across the country. Each pair of jeans has a selling price of 30 with 21 in variable costs of goods sold. The company has fixed manufacturing costs of 1,200,000 and fixed marketing costs of 300,000. Sales commissions are paid to the wholesale sales reps at 5 of revenues. The company has an income tax rate of 25.

Required:
1. How many jeans must Tuff Kids sell in order to break even?
2. How many jeans must the company sell in order to reach:
a. a target operating income of 450,000?
b. a net income of 450,000?
3. How many jeans would TuffKids have to sell to earn the net income in part 2b if (consider each requirement independently).
a. The contribution margin per unit increases by 10
b. The selling price is increased to 32.50
c. The company outsources manufacturing to an overseas company increasing variable costs per unit by 2.00 and saving 60 of fixed manufacturing costs.

Question 2

Which of the following statements best defines the principle of integrity as per AICPA's Code of Professional Conduct ET Sec. 54, Article III?

A) It requires a member to be honest and candid within the constraints of client confidentiality.
B) It urges the members to adequately plan and supervise the performance of professional services.
C) It precludes relationships that may appear to impair a member's objectivity in rendering various professional services.
D) It induces members to disclose any confidential client information without the specific consent of the client.

bitingbit · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1. CMU = 3021(0.05 30) = 7.50

Q = =
= 200,000 pairs
Note: No income taxes are paid at the breakeven point because operating income is 0.

2a. Q = =

=
= 260,000 pairs

2b. Target operating income = 600,000
=

= 280,000 pairs

3a. Contribution margin per unit increases by 10
Contribution margin per unit = 7.50 1.10 = 8.25
=
= 254,545 pairs (rounded)
The net income target in units decreases from 280,000 pairs in requirement 2b to 254,545 pairs.

3b. Increasing the selling price to 32.50
Contribution margin per unit = 32.50 21 (0.05 32.50) = 9.875

=
= 212,658 pairs (rounded)
The net income target in units decreases from 280,000 pairs in requirement 2b to 212,658 pairs.

3c. Increase variable costs by 2.50 per unit and decrease fixed manufacturing costs by 50.
Contribution margin per unit = 30 23 (21 + 2) (0.05 30) = 5.50
Fixed manufacturing costs = (1 0.6) 1,200,000 = 480,000
Fixed marketing costs = 300,000
Total fixed costs = 480,000 + 300,000 = 780,000

=
= 250,909 pairs (rounded)
The net income target in units decreases from 280,000 pairs in requirement 2b to 250,909 pairs.

Answer to Question 2

A
Explanation: A) Integrity requires a member to be honest and candid within the constraints of client confidentiality.