Goose down is used in a wide variety of products, including jackets, bedding, and pillows. In recent years, the cost of down has been increasing. For example, in 2009, a pound of goose down sold for $10; in 2014 it sold for $50.5 Lands' End, a retailer of clothing and bedding items, uses goose down in many of its products.
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 prices of their products to counteract the increasing cost of down.
Requirements
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. 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.
4. Let's look at a hypothetical example now. Assume that a Lands' End down jacket selling for $150 contains one pound of goose down. The cost per pound of down was $10 in 2009 and $50 in 2014, respectively. Lands' End has $250,000 of fixed costs related to the down jacket line and its other variable manufacturing costs (other direct materials, direct labor, and manufacturing overhead) total $60 per jacket. Assume that Lands' End does not increase the selling price of the down jacket over the five-year period. Calculate the breakeven number of jackets both in (a) 2009; and (b) 2014.
5. Assume now the same set of facts as in Question 4 but that Lands' End raises the selling price of each jacket by $25 in 2017. How does the breakeven volume of jackets change in 2017? (Assume that the cost of goose down in 2017 is the same as in 2014.)