A7-72 Impact of increases in direct materials on product breakeven (Learning Objectives 1, 2&3) REAL LIFE 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 October 2010, U Lands' End, a retailer of clothing and bedding items, was paying about $13 for a pound of down in China. By October 2012, that price per pound had risen to about $23 per pound'. The costs of other types and grades of down have increased similarly. nC 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 popular- ity 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 sking and climbing. Now down is used in popular, general feshions Some companies are developing synthetic substitutes for down as they try to coun- teract the increasing costs of the down. In the meantime, companies such as Lands' End, North Face, counteract the increasing cost of down. and other garment manufacturers are raising the price of their products to Requirements . Is the cost of down a fixed cost or a variable cost for a jacket manufacturer such as Lands' End? If the cost of down increases, what happens to the breakeven point for a down-filled jacket product line at Lands End? 2. a. What is the percentage increase in the cost of down per pound from 2010 to 2012 at Lands' End? Would you epect the breakeven units to change by this same percent- 2 Why or why not? need to change by that same percentage to maintain the same profit margin? Explain. 4. If down increases by a certain percentage, wit these Cost 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 (o) October 2010: and (b) October 2012 Do these breakeven numbers agree with your arswers to the prior questions? 6. Assum now the same set of facts as in Question 5 but that Lands' End raises the sell ,ing price of each jacket by $10 in October 2013. Does the contribution centage remainthe same? what the new e-m ato? 2013 piul iiuase