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. $ 80.00 43.50 11.50 55.00 $ Sales price Per unit variable expenses Purchase cost Sales commissions Total per unit variable costs Total annual fixed expenses Advertising Rent Salaries Total fixed expenses $ 98,500 146,500 255,000 $500,000 Required: 1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars. 2. If Bubba's sells 22,000 hats, what is its before tax income or loss? Support your answer by preparing a contribution Income statement 3. If Bubba's sells 32.000 hats, what is its marain of safety (MOS) and MOS ratio?

Answer 1

1 Ans.	Sale Price	$                80.00
	Per Unit Variable Expenses
	Purchase Cost	$                43.50
	Sales Commission	$                11.50
	Per Unit Variable Expenses	$                55.00
	Contribution per Unit	$                25.00	(Sale Price-Variable Cost per Unit)
	Annual Fixed Expenses
	Advertising	$       98,500.00
	Rent	$    1,46,500.00
	Salaries	$    2,55,000.00
	Total Fixed Expenses	$    5,00,000.00
	Break Even Point (in Units)	20000	(Fixed Cost/Contribution per Unit)
	Break Even Point (in Dollars)	$ 16,00,000.00	(Break Even Point (Units) X Sale Price)
2 Ans.	Sales Units	22000
	Sale Price	$                80.00
	Per Unit Variable Expenses
	Purchase Cost	$                43.50
	Sales Commission	$                11.50
	Per Unit Variable Expenses	$                55.00
	Contribution per Unit	$                25.00
	Total Contribution (Rs.)	$    5,50,000.00
	Annual Fixed Expenses
	Advertising	$       98,500.00
	Rent	$    1,46,500.00
	Salaries	$    2,55,000.00
	Total Fixed Expenses	$    5,00,000.00
	Before Tax Income/ Loss	$       50,000.00
	It can also be said that since break even point is 20,000 Units, sales is 22000, contribution from Additional 2000 Units sold is profit i.e., 2000 x 25 = $ 50,000 is Profit
3 Ans.	Sales	32000 Hats
	Margin of Safety (MOS) (Units)	12000	(Sales-Break Even Sales)
	Margin of Safety Ratio (MOS Ratio)	37.50%
4 Ans.	If Sales Commissiom is eliminated and Salaries increased by $ 1,57,000, Than
	Sale Price	$                80.00
	Per Unit Variable Expenses
	Purchase Cost	$                43.50
	Per Unit Variable Expenses	$                43.50
	Contribution per Unit	$                36.50	(Sale Price-Variable Cost per Unit)
	Annual Fixed Expenses
	Advertising	$       98,500.00
	Rent	$    1,46,500.00
	Salaries	$    4,12,000.00
	Total Fixed Expenses	$    6,57,000.00
New	Break Even Point (in Units)	18000	(Fixed Cost/Contribution per Unit)
	Break Even Point (in Dollars)	$ 14,40,000.00	(Break Even Point (Units) X Sale Price)
	Since Variable cost decreased and Fixed cost increased, Break Even Point decreased.
	Sales Units	22000
	Sale Price	$                80.00
	Per Unit Variable Expenses
	Purchase Cost	$                43.50
	Per Unit Variable Expenses	$                43.50
	Contribution per Unit	$                36.50
	Total Contribution (Rs.)	$    8,03,000.00
	Annual Fixed Expenses
	Advertising	$       98,500.00
	Rent	$    1,46,500.00
	Salaries	$    4,12,000.00
	Total Fixed Expenses	$    6,57,000.00
	Before Tax Income/ Loss	$    1,46,000.00
	It can also be said that since break even point is 18,000 Units, sales is 22000, contribution from Additional 4000 Units sold is profit i.e., 4000 x 36.5 = $ 1,46,000 is Profit