Question

The Rozas Roofing Company sells seven different styles of roof tiles in stores throughout Southern California. The roof tiles have identical unit costs and selling prices. A unit is defined as a roof tile. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. Rozas Roofing is considering opening another store that is expected to have the revenue and cost relationships shown here:

UNIT VARIABLE COSTS (per roof tile)

Selling price	$25.00
Cost of roof tile	14.00
Sales commission	1.00
Variable Cost Per Unit	$15.00

ANNUAL FIXED COSTS

Rent	$ 50,000
Salaries	180,000
Advertising	70,000
Other fixed costs	30,000
Total Fixed Costs	$330,000

REQUIRED: (CONSIDER EACH QUESTION INDEPENDENTLY)

1. What is the annual breakeven point in units sold and revenues?
2. If 30,000 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 $60,000, 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 $0.25 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 $0.25 per unit in excess of the breakeven point, what would be the store’s operating income if 45,000 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 62,000 units? What do you think of the motivational aspect of your chosen compensation plan?
8. Suppose the target operating income is $170,000. 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 roof tiles to rise due to inflation and the booming economy, you place a firm bulk order for 50,000 roof tiles and lock in the $14 price per unit. But, toward the end of the year, only 48,000 roof tiles are sold, and you authorize a markdown of the remaining inventory to $12 per unit. Finally, all units are sold. Salespeople, as usual, get paid a commission of 4% of revenues. What is the annual operating income for the store?

Answer 1

Solution for the first four questions:

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

Contribution per unit = Sales - Variable cost

= $25 - $15

= $10

Break even = (Total fixed cost) / (Contribution per unit)

Annual break even (units) = $330,000 / $10

= 33,000 units

Annual break even (revenue) = 33,000 x $25

= $825,000

If 30,000 units are sold, what will be the store’s operating income (loss)?

Particulars	Units	Per unit	Amount
Sales	30,000	$        25	$   750,000
Less: Variable cost	30,000	$     (15)	$ (450,000)
Contribution	30,000	$        10	$   300,000
Less: Fixed costs			$ (330,000)
Operating loss			$   (30,000)

If sales commissions are discontinued and fixed salaries are raised by a total of $60,000, what would be the annual breakeven point in units sold and revenues?

Revised variable costs = Cost of roof tile = $14

Revised contribution = $25 -$14 = $11

Revised fixed cost = $330,000 + $60,000 = $390,000

Break even (units) = $390,000 / $11

= 35,455 units (rounded)

Break even (revenues) = 35,455 x $25 = $886,375

Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.25 per unit sold, what would be the annual breakeven point in units sold and revenues?

Revised Variable cost = Cost of roof tile + Sale commission + Store manager commission

= $14 + $1 + $0.25 = $15.25

Revised contribution = $25 - $15.25 = $

Fixed costs = $330,000 (unchanged)

Break even (units) = $330,000 / $9.75

= 33,846 (rounded)

Break even (revenues) = 33,846 x $25 = $846,150