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| $ 30.00 |
| |
Variable expenses:| |
Invoice cost| $ 13.50 |
Sales commission| 4.50 |
Total variable expenses| $ 18.00 |
| |
| Annual|
Fixed expenses:| |
Advertising| $ 30,000 |
Rent| 20,000 |
Salaries| 100,000 |
Total fixed expenses| $ 150,000 |
* Calculate the annual break-even point in dollar sales and in unit sales for Shop 48. Unit sales to break even = Fixed expenses / Unit CM
$150,000 / 12 = 12500
Dollar Sales to break even = Fixed expenses / CM ratio
$150,000 / 0.40 = $375,000
* If 12,000 pairs of shoes are sold in a year, what would be Shop 48's net operating income or loss? The company is considering paying the store manager of Shop 48 an incentive commission of Shop 48 an incentive commission of 75 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 dollar sales and in unit sales? $18.75 ($18.00 + $0.75) per pair

Contribution margin will be $11.25 ($30.00 – $18.75) per pair. Profit = Unit CM × Q − Fixed expenses
$0= ($30.00 − $18.75) × Q − $150,000
$0= ($11.25) × Q − $150,000$11.25
Q= $150,000
Q= $150,000 ÷ $11.25Q= 13,333 pairs (rounded)
13,333 pairs × $30.00 per pair = $400,000 in sale

1. Net operating income or loss for 12,000 pairs of shoes:
Sales $360,000
Variable Expenses ($216,000)
Contribution Margin $144,000
Fixed Expenses ($150,000)
Net Operating Loss ($6000)
2. Break even point in dollar sales for 12,000 pairs:
Fixed expenses / CM ratio = $150,000 / 0.40 = $375,000
3. Break even point in unit sales for 12,000 pairs:
Fixed expenses / unit CM = $150,000 / $12 = 12,500
* Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager 50 cents commission on each pair of shoes sold...

...
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Chapter 2 - Discussion Questions (Making Research Decisions) #1
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2 Pages

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