Question

Question No-1

Shirts unlimited operate a chain of shirt stores around the country. The stores carry many styles of shirts that are all sold at the same price. To encourage sales personnel to be aggressive in their sales efforts, the company pays a substantial sales commission on each shirt sold. Sales personnel also receive a small basic salary. The following worksheet contains cost and revenue data for store “Mix & Match”. These data are typical of the company’s many outlets:

Particulars	Amount (Per unit)
Selling Price	TK. 45.00
Variable expenses:
Invoice Cost	16.00
Sales Commission	9.00
Total Variable Expenses	25.00
Fixed Expenses:
Rent	80000
Advertising	250000
Salaries	70000
Total Fixed Expenses	400000

Shirts unlimited are a fairly new organization. The company has asked you, as member of its planning group, to assist in some basic analysis of its stores and company policies.

Required:

1. Often the most direct route to a business decision is an incremental analysis. What is meant by an incremental analysis?  
2. Calculate the annual breakeven point in TK. Sales and in unit sales for store “Mix & Match” (Use CM approach).
3. The company is considering paying the store manager of store “Mix & Match” an incentive commission of TK. 3 per shirt (in addition to the salesperson’s commissions). If this change is made, what will be the new breakeven point in TK. Sales and in unit sales for store “Mix & Match” (Use equation method)?
4. Refer to the original data. The company is considering eliminating sales commission entirely in its stores and increasing fixed salaries by Tk. 105000 annually. If this change is made, what will be the net operating or loss if 25000 units are sold in a year?  

Answer 1

a) Taking decision on time is very important in every aspect of business. We use many different tool for decision making .Incremental analysis or Marginal Analysis is one among them. It is simple and poweful.

Incremental Analysis uses 'Cost - behavior concept' to analyse how each cost (Variable and fixed ccost) will affect the different alternatives of future income. Incremental analysis studies the cost and revenue difference between the various alternatives. It focus on three major cost components for analysis.

Relevent Cost- Cost and Revenue that are different among alternatives against those that same.

Sunk Cost - Cost that have already been incurred and nothing to do with decision process ( No impact)

Opportunity Cost - Cxost of loosing a potential benefit from another alternatives.

The main aspect of incremental analysis is to correctly identify the relevant costs and revenues between the various options at hand and use them to arrive at the decision.

b)

BEP Sales (Units)	=	Fixed Cost / CM (Revenue per Unit - Variable cost per unit)
	=	400000/(45-25)
	=	400000/20
	=	20000

c)

BEP (Units) X	=	FC / P-V
	=	Fixed Cost / CM (Sale price per Unit - Variable cost per unit)
	=	400000/(45-28)
	=	400000/17
	=	23530

d)

Total Fixed Cost = 435,000

Total Variable Cost = 16/unit

Net Revenues	25000 x 45	1125000
Variable Manufaturing cost	25000 x 16	400000
Contribution Margin ( Revenue -V.Cost)		725,000 Tk
Fixed Cost		435,000
Operating Income ( CM- F.Cost)		290,000Tk