Question

The Fashion Shoe Company operates a chain of women’s shoe shops that carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a sales commission on each pair of shoes sold plus a small base salary.

The following data pertains to Shop 48 and is typical of the company’s many outlets:

		Per Pair of Shoes
Selling price		$	30.00
Variable expenses:
Invoice cost		$	13.50
Sales commission			4.50
Total variable expenses		$	18.00
		Annual
Fixed expenses:
Advertising		$	30,000
Rent			20,000
Salaries			100,000
Total fixed expenses		$	150,000

2. Prepare a CVP graph showing cost and revenue data for Shop 48 from zero shoes up to 17,000 pairs of shoes sold each year. Clearly indicate the break-even point on the graph

3. If 12,000 pairs of shoes are sold in a year, what would be Shop 48’s net operating income (loss)?

4. The company is considering paying the Shop 48 store manager an incentive commission of 75 cents per pair of shoes (in addition to the salesperson’s commission). If this change is made, what will be the new break-even point in unit sales and dollar sales? (Do not round intermediate calculations. Round your final answers to the nearest whole number.)

4. The company is considering paying the Shop 48 store manager an incentive commission of 75 cents per pair of shoes (in addition to the salesperson’s commission). If this change is made, what will be the new break-even point in unit sales and dollar sales? (Do not round intermediate calculations. Round your final answers to the nearest whole number.)

5. Refer to the original data. As an alternative to (4) above, the company is considering paying the Shop 48 store manager 50 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be Shop 48's net operating income (loss) if 15,000 pairs of shoes are sold?

6. Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $31,500 annually. If this change is made, what will Shop 48's new break-even point in unit sales and dollar sales? (Do not round intermediate calculations.)

Answer 1

contribution margin per unit	30-18	12
contribution margin ratio = contribution margin per unit/selling price per unit	12/30	0.4
total fixed cost		150000
break even point in units = total fixed cost/contribution margin per unit	150000/12	12500
break even point in dollars	150000/40%	375000
level of activity	0	2500	5000	7500	10000	12500	15000	17500
sales	0	75000	150000	225000	300000	375000	450000	525000
less total variable cost	0	45000	90000	135000	180000	225000	270000	315000
contribution	0	30000	60000	90000	120000	150000	180000	210000
total fixed cost	150000	150000	150000	150000	150000	150000	150000	150000
operating profit	-150000	-120000	-90000	-60000	-30000	0	30000	60000
level of activity	total sales	total variable cost	total fixed cost	total cost	profit
0	0	0	150000	150000	-150000
2500	75000	45000	150000	195000	-120000
5000	150000	90000	150000	240000	-90000
7500	225000	135000	150000	285000	-60000
10000	300000	180000	150000	330000	-30000
12500	375000	225000	150000	375000	0
15000	450000	270000	150000	420000	30000
17500	525000	315000	150000	465000	60000

3- when 12000 units are sold
sales	12000*30	360000
less total variable cost	12000*18	216000
contribution		144000
total fixed cost		150000
operating profit		-6000
4-
contribution margin per unit	30-18.75	11.25
contribution margin ratio = contribution margin per unit/selling price per unit	11.25/30	0.375
total fixed cost		150000
break even point in units = total fixed cost/contribution margin per unit	150000/11.25	13333
break even point in dollars	150000/.375	400000
5-
sales	15000*30	450000
less total variable cost =(12500*18)+(2500*.5)	(12500*18)+(2500*0.5)	226250
contribution		223750
total fixed cost		150000
operating profit		73750
6-
contribution margin per unit	30-13.5	16.5
contribution margin ratio = contribution margin per unit/selling price per unit	13.5/30	0.45
total fixed cost	150000+31500	181500
break even point in units = total fixed cost/contribution margin per unit	181500/12	15125
break even point in dollars	181500/45%	403333.33