Question

The Fashion Shoe Company operates a chain of women’s shoe shops that carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a sales commission on each pair of shoes sold plus a small base salary.

The following data pertains to Shop 48 and is typical of the company’s many outlets:

		Per Pair of Shoes
Selling price		$	20.00
Variable expenses:
Invoice cost		$	7.00
Sales commission			3.00
Total variable expenses		$	10.00
			Annual
Fixed expenses:
Advertising		$	32,000
Rent			21,000
Salaries			105,000
Total fixed expenses		$	158,000

Required:

1. What is Shop 48's annual break-even point in unit sales and dollar sales? (Do not round intermediate calculations.)

Answer 1

>> Contribution margin per unit = Selling price - Variable cost per unit.

>> Contribution margin per unit = $ 20 - $ 10 = $ 10.

>> Break Even point in unit Sales = Fixed cost / Contribution margin per unit.

>> Break even point in unit sales = $ 158,000 / $ 10 = 15,800 Units.

>> Break even point in dollar sales = Break even units * Selling price.

>> Break even point in dollar sales = 15,800 * $ 20 = $ 316,000.