Question

Bubba’s Western Wear is a western hat retailer in Lubbock, Texas. Although Bubba’s carries numerous styles of western hats, each hat has approximately the same price and invoice (purchase) cost, as shown in the following table. Sales personnel receive a commission to encourage them to be more aggressive in their sales efforts. Currently, the Lubbock economy is really humming, and sales growth at Bubba’s has been great. The business is very competitive, however, and Bubba, the owner, has relied on his knowledgeable and courteous staff to attract and retain customers who otherwise might go to other western wear stores. Because of the rapid growth in sales, Bubba is also finding the management of certain aspects of the business more difficult, such as restocking inventory and hiring and training new salespeople.

Sales price $ 80.00 Per unit variable expenses

Purchase cost 27.50

Sales commissions 27.50

Total per unit variable costs $ 55.00

Total annual fixed expenses

Advertising $ 257,500

Rent 228,000 Salaries 360,500

Total fixed expenses $ 846,000

Required:

1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars.

2. If Bubba’s sells 35,000 hats, what is its before-tax income or loss? Support your answer by preparing a contribution income statement.

3. If Bubba’s sells 48,000 hats, what is its margin of safety (MOS) and MOS ratio?

4. Bubba is considering the elimination of sales commissions completely and increasing salaries by $309,000 annually. What would be the new breakeven point in units? What would be the before-tax income or loss if 35,000 hats are sold with the new salary plan?

Answer 1

Answer: Break even point = fixed expenses/sales-variable cost) = $846.000 480-455) .: Breakeven point = 33.840 Break even sales - Break even point x sales = 33,840 x $80 - Break even sales = $2,707,200 3) coutoiberlion Income. - particulars amount sales (35,000 x $80) $2,800,000 Leut variable cost (35,000x$55) $1,925.000 Contribution Margin $875,000 Less Fixed cost $846,000 pretax Income (Loss) $29,000 3) Margin of safety = (sales - Break even point )x sales price - 48.000- 33.840) $80 = $1139,800 Margin of safety ratio = {margin of safety/ sales 3100 [$1,132,800/48000 X80)] 00 - $1,32,80033,840,000]*100 salaries margin of safety ratio = 29.5% 4) New breakeven poink a Advertising $252500 Reut : $2.28000 ($360,500+$309000) M : $ 669,500 $1,155,000 New break even point = $1,155,000/1$80-$27.50) - $ 1,155,000 :New break even point = 22,000 vuitas 2.5 Before tase Income (Cosy)=(25,0001480-$27.50)] - $1,155,000 :: Before tax Incomellors)= $682,500