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	$	40.00
Variable expenses:
Invoice cost	$	19.50
Sales commission		4.50
Total variable expenses	$	24.00
		Annual
Fixed expenses:
Advertising	$	30,000
Rent		24,000
Salaries		120,000
Total fixed expenses	$	174,000

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

     

2.	If 9,975 pairs of shoes are sold in a year, what would be Shop 48’s net operating income or loss?

     

3.	The company is considering paying the store manager of Shop 48 an incentive commission of 80 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.)

     

4.	Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $31,000 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

Answer to Requirement 1.

Unit Contribution Margin = Unit Sales Price – Unit Variable Cost
Unit Contribution Margin = $40.00 - $24.00
Unit Contribution Margin = $16.00

Break Even Point (Units) = Fixed Cost / Unit Contribution Margin
Break Even Point (Units) = $174,000 / $16.00
Break Even Point (Units) = 10,875 Units

Break Even Point (Dollar Sales) = Break Even Point (Units) * Unit Sales Price
Break Even Point (Dollar Sales) = 10,875 * $40.00
Break Even Point (Dollar Sales) = $435,000

Answer to Requirement 2.

Net Operating Income = Contribution Margin – Fixed Cost
Net Operating Income = (9,975 * $16.00) - $174,000
Net Operating Income (Loss) = -$14,400

Answer to Requirement 3.

Proposed Unit Variable Cost = $24.00 + $0.80
Proposed Unit Variable Cost = $24.80

Proposed Unit Contribution Margin = $40.00 - $24.80
Proposed Unit Contribution Margin = $15.20

Break Even Point (Units) = Fixed Cost / Unit Contribution Margin
New Break Even Point (Units) = $174,000 / $15.20
New Break Even Point (Units) = 11,447 Units

Break Even Point (Dollar Sales) = Break Even Point (Units) * Unit Sales Price
New Break Even Point (Dollar Sales) = 11,447 * $40.00
New Break Even Point (Dollar Sales) = $457,880

Answer to Requirement 4-a.

Proposed Unit Variable Cost = $24.00 - $4.50
Proposed Unit Variable Cost = $19.50

Proposed Unit Contribution Margin = $40.00 - $19.50
Proposed Unit Contribution Margin = $20.50

Proposed Fixed Cost = $174,000 + $31,000
Proposed Fixed Cost = $205,000

Break Even Point (Units) = Fixed Cost / Unit Contribution Margin
New Break Even Point (Units) = $205,000 / $20.50
New Break Even Point (Units) = 10,000 Units

Break Even Point (Dollar Sales) = Break Even Point (Units) * Unit Sales Price
New Break Even Point (Dollar Sales) = 10,000 * $40.00
New Break Even Point (Dollar Sales) = $400,000