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		33.50
Sales commissions		21.50
Total per unit variable costs	$	55.00
Total annual fixed expenses
Advertising	$	197,500
Rent		198,000
Salaries		313,250
Total fixed expenses	$	708,750

Required:

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

2. If Bubba’s sells 29,000 hats, what is its before-tax income or loss? Support your answer by preparing a contribution income statement.

3. If Bubba’s sells 42,000 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 $244,500 annually. What would be the new breakeven point in units? What would be the before-tax income or loss if 29,000 hats are sold with the new salary plan?

Answer 1

Solution available Dala 80.O0 unit per 5S. SO fer unit Fired Cos 0850 Break even Fieed (osh point In unih) F.C P-UC)py Cont 2 8,350 StOt Beakevenpaint omount F.Cosh 7087SO sP-vsP} (in (80-55)1 308SOIS 3.2 Cs Scanned with feamscanner 2268000

Contibuhen Incema 8tala ment Amount () Amount () Rovenue: ale 29000 x 80) 23,20 o0D Costs Jariable 2900D33.5) Purchane cot 8 alen com mission 91500 (2900D 21-5) I5a5,000) 623,550 Conbi buhon ar 25000 Fired Cost Ad rer Hsing Rent 1१7Sठ० 19800D 313,250 Salasie 6,2S0 Net 9nceme u2000 hats, At BlE Saler CurrentSaler MOS= 28,350 (units) 42000 3,650 hat MOS (amount) MOS Current Salo 32.5 11 1092000 (42000 8o Scanned with CamScanner

fieed (ost Proposed 8 1१7,ऽऽO 198,000 SS50 Rent 8alories (3132 SD+24SOD) Total Piped (os* $953250 Roposed 33. SO Voriable Cost per hat Breakeven 953,250 &0-33,5) Point Cnunits) 20 SOO units sale At units 2१,0০0 Contibution &0-33.5) 29 O00 134&SUD 29ncome Conk Fired (ast 1348S00 93250 $395,250 es Scanned withia CamScanner