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 substantial commission on each pair of shoes sold (in addition to a small base salary) in order to encourage them to be aggressive in their sales efforts.

The following worksheet contains cost and revenue data for Shop 48 and is typical of the company’s many outlets:

	Per Pair of Shoes
Selling price	$	25.00
Variable expenses:
Invoice cost	$	10.50
Sales commission		4.50
Total variable expenses	$	15.00
		Annual
Fixed expenses:
Advertising	$	40,000
Rent		37,000
Salaries		180,000
Total fixed expenses	$	257,000

Required:
1.	Calculate the annual break-even point in unit sales and in dollar sales for Shop 48.

     

3.	If 25,400 pairs of shoes are sold in a year, what would be Shop 48’s net operating income or loss?

       

4.	The company is considering paying the store manager of Shop 48 an incentive commission of 70 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 in 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 store manager 45 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be the shop’s net operating income or loss if 28,200 pairs of shoes are sold? (Do not round intermediate calculations.)

        

6.	Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $30,100 annually.

     

a.	If this change is made, what will be the new break-even point in unit sales and in dollar sales for Shop 48? (Do not round intermediate calculations.)

         

Answer 1

Ans)

1) Unit sales to break even = fixed expenses / unit contribution margin

= 257,000 / 25-15

= 257000 / 10

= 25,700 units

Dollar sale to break even = Fixed expenses / Contribution margin ration

= 257,000 / 0.4

= 642500

Contribution margin = 25-15 / 25 X 100 = 40%

3) If 25,400 pairs of shoes are sold in ayear net operating income or loss is

Sales (25400 pairs × $25.00 per pair)......................... 635,000

Variable expenses    (25,400 pairs × $15.00 per pair)................................ (381,000)

Contribution margin..................................................... 254,000

Fixed expenses............................................................. (257,000)

Net operating loss......................................................... (3000) 4) If 70cents per pair of shoes is paid Units sales to break even = fixed cost / contribution margin per uit = 257000 / 25-15-0.7 = 257000 / 9.3 = 27634 units Contribution margin ration = 25 - 15 - 0.7 / 25 X 100 = 37.2 % Dollar sales to break even = Fixed expenses / CM ratio = 257,000 / 0.372 = 690860 5) Sales (28200 pairs × $25.00 per pair)............................ 705000 Variable expenses (28200 pairs × $15 per pair; 2,500 pairs × $0.45 per pair) (424125) Contribution margin.............................................................. 280875 Fixed expenses..................................................................... (257000) Net operating income.............................................................. 23875 6) New variable expenses = 10.5 Break even in units = fixed cost / contribution per unit = 257000 + 30100 / 25 - 10.5 = 287100 / 14.5 = 19800 units Dollar sale to break even = Fixed cost / CM ratio = 287100 / 0.58 = 495000 CM ratio = 14.5 / 25 X 100 = 58%