Goose down is used in a wide variety of products, including jackets, bedding, and pillows. In recent years, the cost
The cost of down has increased because of a few reasons. First of all, China is one of the major producers of down in the world. China’s wealth has been increasing. As a result, more families are moving from farms to urban areas thereby reducing the number of families who are farming. In addition, dietary preferences around the world are changing to more meat and fish over geese and ducks, decreasing the potential revenue from raising geese.
On the demand side, the demand for down is increasing. The increasing popularity of down jackets from a fashion standpoint is driving most of the increase in demand for down. In prior decades, down was just used for specialized winter sports apparel for skiing and climbing. Now down is used in popular, general fashions.
Some companies are developing synthetic substitutes for down as they try to counteract the increasing costs of the down. In the meantime, companies such as Lands’ End, North Face, and other garment manufacturers are raising the price of their products to counteract the increasing cost of down.
1. Is the cost of down a fixed cost or a variable cost for a jacket manufacturer such as Lands’ End?
2. If the cost of down increases, what happens to the breakeven point for a down- filled jacket product line at Lands’ End?
3. What is the percentage increase in the cost of down per pound from 2010 to 2012 at Lands’ End? Would you expect the breakeven units to change by this same percent-age? Why or why not?
4. If down increases by a certain percentage, will the selling price of a down- filled jacket need to change by that same percentage to maintain the same profit margin? Explain.
5. Assume that a Lands’ End down jacket selling for $ 100 uses 12 ounces of down. Further assume that Lands’ End has $ 250,000 of fixed costs related to the down jacket line and its other variable manufacturing costs (direct materials, direct labor, and manufacturing overhead) total $ 60 per jacket. As stated in the story, the cost per pound of down was $ 13 and $ 23 in October 2010 and October 2012, respectively. Calculate the breakeven number of jackets both in (a) October 2010; and (b) October 2012.
Do these breakeven numbers agree with your answers to the prior questions?
6. Assume now the same set of facts as in Question 5 but that Lands’ End raises the selling price of each jacket by $ 10 in October 2013. Does the contribution margin percentage remain the same?
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Question Posted: August 27, 2014 06:00:16