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	$	20.00
Variable expenses:
Invoice cost	$	6.00
Sales commission		4.00
Total variable expenses	$	10.00
		Annual
Fixed expenses:
Advertising	$	33,000
Rent		27,000
Salaries		135,000
Total fixed expenses	$	195,000

Required:

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

3. If 18,900 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 22,700 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 $30,400 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