Question

Required information Problem 5-26 CVP Applications; Break-Even Analysis; Graphing (LO5-1, LO5-2, LO5-4, LO5- 5) [The following information applies to the questions displayed below.] 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 $ 25.00 Selling price Variable expenses: Invoice cost Sales commission Total variable expenses $ 11.00 4.00 15.00 Annual $ Fixed expenses: Advertising Rent Salaries Total fixed expenses $ 48,000 35,000 200,000 $ 283,000

A.) What is Shop 48's annual break-even point in unit sales and dollar sales?

B.) If 27,600 pairs of shoes are sold in a year, what would be Shop 48’s net operating income (loss)?

C.) 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?

D.) Refer to the original data. As an alternative to (C) 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 31,200 pairs of shoes are sold?

Answer 1

Answer A.

Contribution margin per pair of shoes = Selling price per pair of shoes - Variable expenses per pair of shoes
Contribution margin per pair of shoes = $25.00 - $15.00
Contribution margin per pair of shoes = $10.00

Breakeven point in unit sales = Fixed expenses / Contribution margin per pair of shoes
Breakeven point in unit sales = $283,000 / $10
Breakeven point in unit sales = 28,300

Breakeven point in dollar sales = Breakeven point in unit sales * Selling price per pair of shoes
Breakeven point in dollar sales = 28,300 * $25.00
Breakeven point in dollar sales = $707,500

Answer B.

Net operating income = Contribution margin per pair of shoes * Number of pair of shoes sold - Fixed expenses
Net operating income = $10.00 * 27,600 - $283,000
Net operating income = -$7,000

Answer C.

New variable expenses per pair of shoes = $15.00 + $0.75
New variable expenses per pair of shoes = $15.75

New contribution margin per pair of shoes = Selling price per pair of shoes - New variable expenses per pair of shoes
New contribution margin per pair of shoes = $25.00 - $15.75
New contribution margin per pair of shoes = $9.25

New breakeven point in unit sales = Fixed expenses / New contribution margin per pair of shoes
New breakeven point in unit sales = $283,000 / $9.25
New breakeven point in unit sales = 30,595

New breakeven point in dollar sales = New breakeven point in unit sales * Selling price per pair of shoes
New breakeven point in dollar sales = 30,595 * $25.00
New breakeven point in dollar sales = $764,875

Answer D.

Commission to store manager = $0.50 * (31,200 - 28,300)
Commission to store manager = $1,450

Net operating income = Contribution margin per pair of shoes * Number of pair of shoes sold - Fixed expenses - Commission to store manager
Net operating income = $10.00 * 31,200 - $283,000 - $1,450
Net operating income = $27,550