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		$	25.00
Variable expenses:
Invoice cost		$	11.50
Sales commission			3.50
Total variable expenses		$	15.00
			Annual
Fixed expenses:
Advertising		$	44,000
Rent			34,000
Salaries			170,000
Total fixed expenses		$	248,000

Required:

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

3. If 24,000 pairs of shoes are sold in a year, what would be Shop 48’s net operating income (loss)?

4. The company is considering paying the Shop 48 store manager an incentive commission of 75 cents per pair of shoes (in addition to the salesperson’s commission). If this change is made, what will be the new break-even point in unit sales and dollar sales? (Do not round intermediate calculations. Round your final answers to the nearest whole number.)

5. Refer to the original data. As an alternative to (4) above, the company is considering paying the Shop 48 store manager 50 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be Shop 48's net operating income (loss) if 27,100 pairs of shoes are sold? (Do not round intermediate calculations.)

6. Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $35,500 annually. If this change is made, what will be Shop 48's new break-even point in unit sales and dollar sales? (Do not round intermediate calculations.)

Answer 1

Fashion Shoe Company Requirement 1 BEP (Units ) = Fixed Cost / (Selling price - Variable cost per unit) %3! 248000 /( 25 - 15 ) = 24800 Units %3D BEP (dollars ) = Fixed Cost / (Selling price - Variable cost per unit)/selling price)) = 248000 / (( 25 - 15 ) / 25) = 248000 / 40% = 620000 Requirement 3 Income Statement (24000 units) Sales 600000 Less: Variable expense 360000 (24000 x 15) 240000 Less:Fixed Cost -248000 Net Loss -8000 Requirement 4 Variable expense will now be $15.75 ($15 + $0.75) per pair , and the contribution margin will be $9.25 ($25 - $15.75) per pair Profit = Unit Contribution Margin x Quantity - Fixed Expenses ( $25 - $15.75 ) x Q - 248000 $9.25 Q = 248000 = 26811 pairs %3D 26811 x $ 25 = $670275 sales %3D

Requirement 5 Income Statement (27100 units) 677500 Sales Less: Variable expense (24000 x 15) Extra Comm. (27100 - 24800 ) x 0.50 360000 1150 316350 Less:Fixed Cost -248000 Net Profit 68350 Requirement 6 BEP (Units ) = Fixed Cost / (Selling price - Variable cost per unit) = (248000 + 35500 ) / ( 25 - 15 + 3.50 ) %3! %3D = 210800 Units %3D BEP (dollars ) = Fixed Cost / (Selling price - Variable cost per unit)/selling price)) 283500 / (( 25 - 11.5 ) / 25) %3D = 283500 / 54% = $525000 %3!