Question

The Hiking Shop is a store that specializes in hiking shoes. The owner, Angelo, has just received a degree in business and is anxious to apply the principles he has learned to his business. In time, he hopes to open a second shop. As a first step, he has prepared the following monthly analysis for his new store:

                                    Monthly

Sales (3,000 pairs)     $150,000

Variable Costs               60,000

Contribution Margin     90,000

Fixed Costs                   75,000

Net Income                 $ 15,000

1. How many hiking shoes must be sold each year to break even? (2 pts)

2. Angelo must earn $22,000 of monthly net income to afford his lifestyle. How many pairs of hiking shoes must be sold to reach this target profit? (3 pts)

3. Angelo has taken a managerial accounting graduate class. He came up with the following scenario that he thinks will allow him to reach his goal.

• The Hiking Shop has two sales people (all sales are made by these 2 people) currently making a fixed salary of $2,500 per person per month. Angelo will change these employees from salary to 100% sales commission. The 2 sales people will earn a 10% sales commission for all hiking shoes sold. He thinks this will motivate the employees to sell more so units sold will increase by 1,000 units.
• Lastly, Angelo thinks advertising is important. He wants to increase advertising by $10,000 per month. He thinks this will raise units sold by an additional 350 units.

Create a proposed income statement based on Angelo’s ideas. Calculate the new break even in units. Should Angelo introduce these changes?   16 pts

4. Create your own scenario. Be as creative as you want.   Provide detailed ideas, your proposed income statement and calculate a new breakeven. Was your suggestion successful? 5 pts

Answer 1

Updated Part 4:

	Part 4
	Instead of working at shop, we can work out on selling the hiking shoes over online windows, it would save sales persons salary by $5,000 every month. Also, Company will be able to reduce the fixed expenses by further 25% due to this change. Also, Company has contracted to the raw materials and fixed the contract on annual basis, this would save 10% of the variable cost in total. By Advertising, company can increase its sales by 1200 Pair per month with a cost of $ 12,500 on advertisement
	New Variable Cost ($ 20 - 10%)	$ 18
	New Fixed Cost (Monthly)
	=($ 75000 - $ 5000)*(1-25%)} + $ 12500	65000
	Revised Sales Pair (3000 + 1000)	4000
	Proposed Income Statement (Yearly)
	Particulars	Amount
	Sales (4000 Pairs*12 = 48,000 Pairs)	$     24,00,000
	Less. Variable Cost including sales Commission	$       8,64,000
	Contribution Margin	$     15,36,000
	Less. Fixed Cost	$       7,80,000
	Net Income	$       7,56,000
	New Break-even point
	Break-even (pairs) = Total Fixed cost / Contribution Margin per pair
	= $ 780,000/$ 32
	=24,375 pairs