Question 1

W Promotions sells T shirts imprinted with college names and logos. Next year, the shirts are expected to sell for $18 each and variable costs will be $5.40 per shirt. At this cost structure, fixed costs are expected to be $252,000.

a) Assume that 30,000 shirts are estimated to be sold next year. Construct a direct costing (contribution) format income statement for next year.

b) Compute the expected contribution margin per unit and the contribution margin ratio.

c) How many units must W Promotions sell next year in order to break even?

d) How many sales dollars must W Promotions earn in order to break even next year?

e) Based upon the above calculations, what is the margin of safety for the company in dollars and percent?

f) What is the expected operating leverage for W Promotions based upon the information you derived in part (a)?

g) Based upon your calculations in part (f), if your expected sales increase by 20 percent, by what percentage would net income increase?

h) Go back to the original information given in the problem. Assume that the company determines that its variable costs will increase by $1.80 per shirt, fixed costs will increase by $30,900, and the selling price will increase to $21 per shirt. What will the new break-even point in units be?

i) Using the same information you derived in part (h), how many shirts must be sold to earn $28,980?

Question 2

The company must decide whether to keep the old machine or buy the new machine.

a) Identify the costs that will be relevant in making the decision.

b) List 3 qualitative factors that also must be considered in making the decision.