Question

The WalkRite Shoe Company operates a chain of shoe stores that sell ten different styles of inexpensive 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. WalkRite is considering opening another store that is expected to have the revenue and cost relationships shown here:

UNIT VARIABLE COSTS (per pair of shoes) Selling price $30.00

Cost of shoes 19.50

Sales commission 1.50

Variable Cost Per Unit $21.00

ANNUAL FIXED COSTS

Rent $ 60,000

Salaries 200,000

Advertising 80,000

Other fixed costs 20,000

Total Fixed Costs $360,000

(CONSIDER EACH QUESTION INDEPENDENTLY)

1. What is the annual breakeven point in units sold and revenues?

2. If 35,000 units are sold, what will be the store’s operating income (loss)?

3. If sales commissions are discontinued and fixed salaries are raised by a total of $81,000, what would be the annual breakeven point in units sold and revenues?

4. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.30 per unit sold, what would be the annual breakeven point in units sold and revenues?

5. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.30 per unit in excess of the breakeven point, what would be the store’s operating income if 50,000 units were sold?

6. Refer to the original data. Calculate the number of units sold which the owner of WalkRite would be indifferent between the original salary plus commissions plan for salespeople and the higher fixed salaries only plan.

7. As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 55,000 units? What do you think of the motivational aspect of your chosen compensation plan?

8. Suppose the target operating income is $168,000. How many units must be sold to reach the target operating income under (a) the original salary plus commissions plan and (b) the higher fixed salaries only plan?

9. You open the new store on January 1, with the salary plus commission compensation plan in place. Because you expect the cost of the shoes to rise due to inflation, you place a firm bulk order for 50,000 shoes and lock in the $19.50 price per unit. But, toward the end of the year, only 48,000 shoes are sold, and you authorize a markdown of the remaining inventory to $18.00 per unit. Finally, all units are sold. Salespeople, as usual, get paid a commission of 5% of revenues. What is the annual operating income for the store?

Answer 1

1-	annual break even point in units	fixed cost/contribution margin per unit	360000/(30-21)	40000
	annual break even point in revenue	fixed cost/ contribution/sales	360000/(9/30)	1200000
2-	sales	35000*30	1050000
	less variable cost	35000*21	735000
	contribution		315000
	less fixed cost		360000
	operating profit/loss		-45000
3-	annual break even point in units	fixed cost/contribution margin per unit	441000/19.5	22615.38
	annual break even point in revenue	fixed cost/ contribution/sales	441000/(10.5/30)	1260000
	New fixed cost	360000+81000	441000
	new variable cost per unit	21-1.5	19.5
	contribution margin per unit	30-19.5	10.5
4-	annual break even point in units	fixed cost/contribution margin per unit	441000/10.2	43235.29
	annual break even point in revenue	fixed cost/ contribution/sales	441000/(10.2/30)	1297059
	New fixed cost	360000+81000	441000
	new variable cost per unit	19.5+.3	19.8
	contribution margin per unit	30-19.8	10.2
5-	sales	50000*30	1500000
	less variable cost	50000*21	1050000
	gross contribution margin		450000
	less commission above break even point(50000-40000)*.3		3000
	contribution margin		447000
	less fixed cost		360000
	operating profit		87000