Question 2481 of 3960 from exam CFA® LEVEL 1: CFA® Level 1

Question 2481 of 3960 from exam CFA® LEVEL 1: CFA® Level 1

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Question

Annah Korotkin is the sole proprietor of CoverMeUp, a business that designs and sews outdoor clothing for dogs. Each year, she rents a booth at the regional Pet

Expo and sells only blankets. Korotkin views the Expo as primarily a marketing tool and is happy to break even (that is, cover her booth rental). For the last 3 years, she has sold exactly enough blankets to cover the $750 booth rental fee. This year, she decided to make all blankets for the Expo out of high-tech waterproof/breathable material that is more expensive to produce, but that she believes she can sell for a higher profit margin. Information on the two types of blankets is as follows:

Assuming that Korotkin remains most interested in covering the booth cost (which has increased to $840), how many more or fewer blankets (new style) does she need to sell to cover the booth cost? To cover this year's booth costs, Korotkin needs to sell:

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A. B. C. D.

C

To obtain this result, we need to calculate Last Year's Breakeven Quantity, This Year's Breakeven Quantity, and calculate the difference.

Step 1: Determine Last Year's (Basic Blanket) breakeven quantity:

QBE= (Fixed Costs) / (Sales Price per unit "" Variable Cost per unit) = 750 / (25 "" 20) = 150

Step 2: Determine This Year's (New Blanket) breakeven quantity:

QBE= (Fixed Costs) / (Sales Price per unit "" Variable Cost per unit) = 840 / (40 "" 33) = 120

Step 3: Determine Change in Units:

Q = QThis Year"" QLast Year= 120 "" 150 = -30. Korotkin needs to sell 30fewerblankets.

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