Question

Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. In time, she hopes to open a chain of sandal shops. As a first step, she has gathered the following data for her new store:

Sales price per pair of sandals	$	20
Variable expenses per pair of sandals		14
Contribution margin per pair of sandals	$	6
Fixed expenses per year:
Building rental	$	1,800
Equipment depreciation		1,800
Selling		1,800
Administrative		6,600
Total fixed expenses	$	12,000

1. What is the break-even point in unit sales and dollar sales? (Do not round intermediate calculations.)

3. Angie has decided that she must earn a profit of $9,000 the first year to justify her time and effort. How many pairs of sandals must be sold to attain this target profit?

4. Angie now has two salespersons working in the store—one full time and one part time. It will cost her an additional $6,000 per year to convert the part-time position to a full-time position. Angie believes that the change would increase annual sales by $28,000. Should she convert the position? Use the incremental approach. Yes or No.

5. Refer to the original data. During the first year, the store sold only 3,000 pairs of sandals and reported the following operating results:

Sales (3,000 pairs)	$	60,000
Variable expenses		42,000
Contribution margin		18,000
Fixed expenses		12,000
Net operating income	$	6,000

a. What is the store’s degree of operating leverage?

b. Angie is confident that with a more intense sales effort and with a more creative advertising program she can increase sales by 50% next year. Using the degree of operating leverage, what would be the expected percentage increase in net operating income if Angie is able to increase sales by 50%?

Answer 1

Dear Student , please see line by line calculation . Hope you will not find any difficulty while checking below answer .

Thank You .  

	Angie Silva has recently opened The Sandal Shop in Brisbane, Australia,
	Sales Price per oair of sanadal $/ pair				20	a
	Variable cost per oair of sanadal $/ pair				14	b
	Contribution Margin per pair of sanadal $/ pair				6	(a-b)
	Fixed cost		Amnt($)
	Building Rental		1,800
	Equipment depreciation		1,800
	Selling		1,800
	Administrative		6,600
	Total Fixed cost		12,000
	Break even Point		Total Fixed cost/Contribution per unit
			12000/6
1	Break even Point - Pairs		2,000
3	Angie has decided that she must earn profit $9000, need to calculate number of pairs to sold ( unit to sold)
	net profit (desired ) $		9,000
	Fixed cost $		12,000
	Total Contribution $		21,000	a
	Contrbution / unit ( as above)$/ unit ( pair)		6	b
	Number of unit / pairs		3,500	(a/b)
4	Couple of cases in this answer
	a) Conversion of part time person to full time with incremental cost $			6,000
	b) Annual Sales Increase by $ 28000
	Need to determined contribution improvement with increse sales
	c) determined % based on contribution ($/ pair) / Sales $/ pair			30%
	Contribution on additional sales $			8,400
	(30%* Revenue change $ 28000)
	Less incremental cost			6,000
	Incremental gain $			2,400
5
	a) Degree of Operating leverage	Contribution /Net operating Income
	As per question,
	Contribution amount mentioned $	18000
	Net Operating Income $	6000
	a) Degree of Operating leverage	Contribution /Net operating Income
		3.00	Times
	b) As per question :
	Using the degree of operating Leverage
	, what would be the expected percentage
	increase in net Income , Agie is able to increase sales 50%
	So Operating leverage as calculated above	3.00
	Increse in Sales	50%
	So Operating leverage will be	150%