Question

Dorcan Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for $8.40 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,600 shirts to break-even. The after tax net income last year was $5,220. Donnelly's expectations for the coming year include the following: (CMA adapted) The sales price of the T-shirts will be $12. Variable cost to manufacture will increase by one-third. Fixed costs will increase by 10%. The income tax rate of 40% will be unchanged. The selling price that would maintain the same contribution margin ratio as last year is:

Answer 1

$11.23

Step-by-step explanation:

Calculation for the selling price that would maintain the same contribution margin ratio as last year

Selling price per unit = $8.40

Variable cost per unit = $2.25

First step is to the Contribution margin per unit using this formula

Contribution margin per unit = Selling price per unit-Variable cost per unit

Contribution margin per unit= $8.40-$2.25

Contribution margin per unit = $6.15

Second step is to find the Contribution margin ratio using this formula

Contribution margin ratio= Contribution margin / Selling price per unit

Contribution margin ratio= $6.15/$8.40

Contribution margin ratio= 0.73*100

Contribution margin ratio=73%

Third step is to calculate for the Increase in variable cost per unit For coming year

Variable cost per unit will increase by 1/3

Increase in variable cost per unit = 6.15 x 1/3

Increase in variable cost per unit= $2.05

Variable cost per unit = 6.15+2.05

Variable cost per unit = $8.2

Last step is to find the selling price per unit using this formula

Selling price per unit =Variable cost per unit /Contribution margin ratio

Let plug in the formula

Selling price per unit = $8.2/0.73

Selling price per unit= $11.23

Therefore the selling price that would maintain the same contribution margin ratio as last year is $11.23