Question

(The follo.ving information applies to the questions displayed below.) 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 Variable expenses per pair of sandals Contribution margin per pair of sandals Fixed expenses per year Building rental Equipment depreciation Selling Administrative Total fixed expenses $ 11,300 11.300 9.000 13,400 $ 45,000 Problem 5-30 Part 1 Required: 1. What is the break-even point in unit sales and dollar sales? (Do not round Intermediate calculations.) Break-even point in unit Sales pain Break-even point in dollar sales

Answer 1

1.

Break even points in units = Total fixed expenses / Contribution margin per pair

Break even points in units = $45,000 / $15 = 3,000 pairs

Break even point in dollars = Total fixed expenses / Contribution margin ratio

Break even point in dollars = $45,000 / 50% (15/30*100) = $90,000

3.

Unit sale to attain target profit = Total fixed expenses+Target profit / Contribution margin per pair

Unit sale to attain target profit = $45,000+22,500 / $15 = 4,500 pairs

4.

Incremental income = Incremental sales*contribution ratio - Incremental fixed expenses

Incremental income = $39,000*50% - $9,000 = $10,500

As per above results, Yes Angle should convert the position.

5.

a. Degree of operating leverage = Contribution / Operating income

Degree of operating leverage = $60,000 / $15,000 = 4

b. Increase in net operating income = Degree of operating leverage * Increase in sales

Increase in net operating income = 4 * 50 = 200%