Clarke Ltd. is a manufacturer of promotional items. The majority of its revenues is from the production of promotional pens. Clarke imports these pens from China and then imprints them with corporate names. These pens are then distributed to customers, suppliers, etc., for promotional purposes. The pens are purchased in batches of 100 and each batch costs Clarke $95. Imprinting costs $0.35 per pen.

Fixed costs average $275,000 per year. In addition to the variable imprinting costs, Clarke incurs setup charges for each customer. Setup costs average $120 per setup, regardless of the number of pens imprinted on that production run. The selling price is $4.50 per pen. Clarke requires a minimum order of 50 pens and typically sells to customers in batches of 50, 100, 250, or 500 units.

REQUIRED

1. Assuming that Clarke anticipates it will sell 350,000 pens during the year and that the average order size will be 100 pens, calculate Clarke’s operating income and operating margin.

2. Calculate Clarke’s operating income and operating margin assuming it will sell 350,000 pens, but that the average order size will be 250 pens.

3. Calculate the breakeven points (in terms of number of orders) assuming the various batch sizes of 50, 100, 250, and 500 units.