Practise calculating and interpreting contribution, break-even output, margin of safety and profit from figures or graphs and evaluating the technique's business usefulness and limits.
Festival Wear (FW)
FW is a partnership started by two friends, Maz and Jane. FW manufactures and sells high quality T-shirts at $ 40 each. The business can manufacture 35000 T-shirts per month using mass customisation. The T-shirts are only sold at music festivals and concerts and are customised to each event. FW has never advertised the T-shirts, relying on a sales team to attend a festival or concert and personally sell the T-shirts.
Current costs:
- variable: $ 10 per T-shirt
- fixed: $ 200000 per month.
Sales average 27000 T-shirts per month. Currently the sales team is paid a monthly salary, but Maz is proposing a new payment method in order to increase sales volume. This will mean a lower monthly salary but a commission of $ 2 per T-shirt will be paid. Maz estimates that sales volume would increase to 30000 per month.
Costs if the new payment method is introduced:
- variable: $ 12 per T-shirt
- fixed: $ 182000 per month.
Calculate FW's break-even output per month if the new payment method is introduced.
Calculate FW's break-even output per month if the new payment method is introduced.
FC/contribution = BE (1)
F C=182000, V C=12(1)
Contribution =40-(12)(1)=28(1)
182 000/28 = 6500 (3) OFR