(Question and Answer): e sells one style of baseball hat. He buys the hats from a supplier for $36 and sells them for $42. Adam’s cur

Adam Granger operates a kiosk in downtown Chicago, at which he sells one style of baseball hat. He buys the hats from a supplier for $36 and sells them for $42. Adam’s current breakeven point is 33,600 hats per year.

1. Calculate contribution margin per unit.

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2. What is Adam’s current level of fixed costs? (Use the rounded contribution margin per unit calculated in the previous part.)

3. Assume that Adam’s fixed costs, variable costs, and sales price were the same last year, when he made $47,040 in net income. How many hats did Adam sell last year, assuming a 30% income tax rate? (Use the rounded contribution margin per unit calculated in the previous part.)
4. What was Adam’s margin of safety last year?

5. f Adam wants to earn $84,672 in net income, how many hats must he sell, assuming a 30% tax rate? (Use the rounded contribution margin per unit calculated in the previous part.)

6. How many hats must Adam sell to break even if his supplier raises the price of the hats to $37 per hat? (Use the rounded contribution margin per unit for computation.)

7. Adam has decided to increase his sales price to $43 to offset the supplier’s price increase. He believes that the increase will result in a 5% reduction from last year’s sales volume. What is Adam’s expected net income, assuming a 30% tax rate?

Expert Answer

contribution margin per unit=Selling price-Variable cost

=$42-$36

=$6

current level of fixed costs=current breakeven point*contribution margin per unit

=33,600*$6

=$201,600

Sales to be made=Fixed costs+[Net income/(1-tax rate)]/Contribution margin per unit

=$201,600+[$47040*(1-0.3)]/$6

=44,800 hats

margin of safety=Actual sales-Break even sales

=44,800-33,600

=11,200 hats

Sales to be made=Fixed costs+[Net income/(1-tax rate)]/Contribution margin per unit

=$201,600+[$84672*(1-0.3)]/$6

=53,760 hats

break even sales=Fixed cost/Contribution margin per unit

=$201,600/($42-$37)

=40,320 hats

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