Tuff Kids Jeans Co. sells blue jeans wholesale to major retailers across the country. Each pair of jeans has a selling price of $30 and $21 in variable costs of goods sold. The company has fixed manuf

1. To break even, we need to calculate the total contribution margin, which is the revenue minus the variable cost per unit: Contribution margin = $30 - $21 = $9 per unit To cover the fixed costs of $1,200,000 + $300,000 = $1,500,000, we divide the fixed costs by the contribution margin: Break-even point = $1,500,000 ? $9 = 166,667 pairs of jeans 2. a. To reach a target operating income of $450,000, we add the target operating income to the total fixed costs and divide by the contribution margin: Required sales = ($1,200,000 + $300,000 + $450,000) ? $9 = 150,000 pairs of jeans b. To reach a net income of $450,000, we add the net income to the total fixed costs, divide by the (1 - tax rate) and divide by the contribution margin: Required sales = ($1,200,000 + $300,000 + $450,000) ? (1 - 0.25) ? $9 = 194,444 pairs of jeans 3. a. If the contribution margin per unit increases by 10%, the new contribution margin would be: New contribution margin = $30 ? 1.10 - $21 = $9.90 per unit To earn a net income of $450,000 with this new contribution margin, we use the same formula as in part 2b: Required sales = ($1,200,000 + $300,000 + $450,000) ? (1 - 0.25) ? $9.90 = 186,869 pairs of jeans b. If the selling price is increased to $32.50, the new contribution margin would be: New contribution margin = $32.50 - $21 = $11.50 per unit To earn a net income of $450,000 with this new selling price, we use the same formula as in part 2b: Required sales = ($1,200,000 + $300,000 + $450,000) ? (1 - 0.25) ? $11.50 = 141,304 pairs of jeans c. If the company outsources manufacturing to an overseas company and saves 60% of fixed manufacturing costs while increasing variable costs by $2.00, the new contribution margin would be: New contribution margin = $30 - ($21 + $2) = $7 per unit To earn a net income of $450,000 with this new cost structure, we use the same formula as in part 2b: Required sales = ($1,200,000 ? 0.4 + $300,000 + $450,000) ? (1 - 0.25) ? $7= $2,000,000 ? $6 = 333,333 pairs of jeans Note: We multiplied the fixed manufacturing costs by 0.4 (60% cost savings) before adding to the other fixed costs.