Question

The Walk Rite Shoe Company operates a chain of shoe stores. The stores sell ten different styles of inexpensive​ men's shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. Walk Rite is trying to determine the desirability of opening another​ store, which is expected to have the following revenue and cost​ relationships:

Selling price $30.00

Unit variable cost per pair:

Cost of shoes $19.50

Sales commissions 1.50

Total variable costs $21.00

Annual fixed costs:

Rent $60,000

Salaries 200,000

Advertising 80,000

Other fixed costs 20,000

Total fixed costs $360,000

Requirements

​(Consider each question​ independently.)

1.	What is the annual breakeven point in​ (a) units sold and​ (b) revenues?
2.	If 35,000 units are​ sold, what will be the​ store's operating income​ (loss)?
3.	If sales commissions were discontinued for individual salespeople in favour of an $81,000 increase in fixed​ salaries, what would be the annual breakeven point in​ (a) units sold and​ (b) revenues?
4.	Refer to the original data. If the store manager were paid $0.30 per unit sold in addition to his current fixed​ salary, what would be the annual breakeven point in​ (a) units sold and​ (b) revenues?
5.	Refer to the original data. If the store manager were paid $0.30 per unit commission on each unit sold in excess of the breakeven​ point, what would be the​ store's operating income if 50,000 units were​ sold? (This $0.30 is in addition to both the commission paid to the sales staff and the store​ manager's fixed​ salary.)

Answer 1

Question 1

Break Even Point in Units = Fixed Costs / Contribution Margin per Unit

Fixed Costs = $ 360,000

Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit

Sales Price per Unit = $ 30

Variable Cost per Unit = $ 21

Contribution Margin per Unit = 30 - 21 = $ 9

Break Even in Units = 360,000 / 9

Break Even in Units = 40,000 Units

Break Even in Revenue = Fixed Costs / Profit Volume Ratio

Fixed Costs = $ 360,000

Profit Volume Ratio = Contribution Margin per Unit / Selling Price per Unit * 100

PV Ratio = 9/30 * 100

Profit Volume Ratio = 30 %

Break Even in Sales Revenue = 360,000 / 30%

Break Even Point in Sales Revenue = $ 12,00,000

Question 2

Contribution in Sale of 35,000 Units = 35,000 Units * Contribution Margin per Unit

Contribution Margin per Unit = $ 9

Contribution Margin on sale of 35,000 Units = 35,000 * 9

Contribution Margin on Sale of 35,000 Units = 315,000

Operating Income (Loss) from Sale of 35,000 Units = Contribution Margin on Sale of 35,000 Units - Fixed Costs

Operating Income (Loss) = 315,000 - 360,000

Operating (Loss) = ($ 45,000)

Question 3

New Fixed Costs = 360,000 + 81,000 = $ 441,000

Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit

Sales Price per Unit = $ 30

Variable Costs per Unit = $ 19.5

Contribution Margin per Unit = 30 - 19.5 = $ 10.5

Break Even Point in Units = Fixed Costs / Contribution Margin per Unit

Break Even Point in Units = 441,000 / 10.5

Break Even Point in Dollar = 42,000 Units

Break Even Point in Sales Revenue = Fixed Costs / Profit Volume Ratio

Profit Volume Ratio = Contribution Margin per Unit / Sales Price per Unit

Profit Volume Ratio = 10.5 / 30 * 100 = 35 %

Break Even Point in Sales Revenue = 441,000 / 35%

Break Even Point in Sales Revenue = $ 12,60,000

Question 4

Fixed Costs = $ 360,000

Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit

Sales Price per Unit = $ 30

Variable Costs per Unit = 21 + 0.30 = $ 21.30

Contribution Margin per Unit = 30 - 21.30 = $ 8.70

Break Even Point in Units = Fixed Costs / Contribution Margin per Unit

Break Even Point in Units = 360,000 / 8.7

Break Even Point in Dollar = 41,379 Units

Break Even Point in Sales Revenue = Fixed Costs / Profit Volume Ratio

Profit Volume Ratio = Contribution Margin per Unit / Sales Price per Unit

Profit Volume Ratio = 8.7 / 30 * 100 = 29%

Break Even Point in Sales Revenue = 360,000 / 29%

Break Even Point in Sales Revenue = $ 12,41,379

Question 5

as per Question 1 Break Even Point is 40,000 Units

Then Units in Excess of Break Even Points for Manager Commission = 50,000 - 40,000 = 10,000 Units

Sales Commission on 50,000 Units = 50,000 * 1.3 = $ 65,000

Managers Sales Commission = 10,000 Units * 0.30 = $ 3,000

Total Commission = 65,000 + 3,000 = 68,000

Direct Costs for 50,000 Units * 19.5 = $ 975,000

Sales Revenue of 50,000 Units = 50,000 Units * 30 = $ 15,00,000

Operating Income on Sale of 50,000 Units = Sales Revenue - Direct Costs - Total Comission - Fixed Costs

= 15,00,000 - 975,000 - 68,000 - 360,000

= $ 97,000