Question

The Shoe King

You are the owner and manager of in the beautiful Horizon Mall, just outside of Schaumburg, Illinois. You purchased it from Mr. Bundy on December 31, 2018, for $805,000.

For the year 2019, the average price of a pair of shoes that you sold was $80 and over the year, you averaged selling 1,800 pairs per month.

For the shoes that you sold, you paid your suppliers $950,400.

As part of the sales deal, and so you can continue to use the valuable Al Bundy name, you pay Mr. Bundy a royalty of five percent of all sales.

You pay yourself $65,000 per year. You have 10 employees who average $40,000 per year in salary

The payroll taxes and benefits total 15 percent of all salaries.

The rent and other mall services provided (e.g., security) cost $5,000 per month. Electric costs are $2,100 per month, while your phone and internet access cost $900 per month (total for both).

Advertising efforts were distributed over three media. The store has a billboard near the mall that costs $1,000 per month. Sales announcements and coupons were delivered via direct mail at a cost of $2,000 per month. You spent that same amount ($2,000 per month) for radio advertising.

Other costs include:

Insurance $500 per month

Accounting/legal $1,000 per month

Office supplies $1,250 per month

During the year, you became concerned about your profitability. Hence, you hired a consultant to evaluate your operations. She was paid $10,000.

1) Construct the income statement for 2019. Make sure to include a column showing percentage of sales.

2) What is the gross profit in dollars and on a percentage basis?

            -$777,600 -45%

3) What is the operating profit?

4) What was the breakeven sales level for 2019?

5) What was the ROI in 2019?

6) For one pair of Johnston & Murphy Oxford shoes, you pay the supplier $80. Your retail on that pair of shoes is $155. What is your gross profit in dollars on that pair of shoes? What is your markup in dollars? What is your gross profit percentage? What is your markup percentage?

7) Suppose your cost of goods sold in dollars was reduced by 10 percent. What would your gross and operating profits be?

8) In 2020, you project a 20 percent increase in sales. You also plan to give a 6 percent wage increase to your employees, although you intend to pay yourself the same amount as in 2019. The other operating costs remain the same, except that you do not expect to hire the consultant again. The royalty rate remains the same. The cost of goods sold is projected to be 49.50%. What is the projected gross profit in dollars for 2020? What is the projected operating profit in dollars?

Answer 1

2	Income statement		Solution for other questions
	Revenues		Amount USD	% of Sales			Amount USD
		Merchandise sales	1,728,000.00	100%	1	Gross profit	777,600.00
						GP as % of sales	45%
	Expenses
		cost of goods sold	950,400.00	55%	3	Operating profit	381,200.00
		royalty	86,400.00	5%
		self	65,000.00	4%	4	Break even sales level
		salaries	40,000.00	2%		Fixed cost	396,400.00
		payroll taxes	6,000.00	0%		Variable cost	950,400.00
		rent and mall services	60,000.00	3%
		electricity	25,200.00	1%		Break even sales	Fixed cost x Sales
		phone and internet	10,800.00	1%			Sales- Variable cost
		biilboard cost	12,000.00	1%
		coupon cost	24,000.00	1%		Break even sales	880,888.89
		radio advertisement	24,000.00	1%
		insurance	6,000.00	0%	5	ROI	Net income
		accounting & legal	12,000.00	1%			Original capital cost of invesment
		office supplies	15,000.00	1%
		consultancy	10,000.00	1%		ROI	47%
			1,346,800.00	78%
	Net Income		381,200.00	22%	6	Gross profit	669,600.00
						Gross profit%	41%
						Markup	Gross profit/total cost
						Markup%	70%
					7	Gross profit	872,640.00
						Operating profit	476,240.00
					8	Projected Gross profit	1,603,152.00
						Projected Operating profit	1,214,352.00