CVP Analysis; Strategy Hank’s Western Wear is a western hat retailer in Lubbock, Tex...

CVP Analysis; Strategy Hank’s Western Wear is a western hat retailer in Lubbock, Texas. Although Hank’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 large commissions to encourage them to be more aggressive in their sales efforts. Currently, the Lubbock economy is really humming, and sales growth at Hank’s has been great. The business is very competitive, however, and Hank, 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, Hank is also finding the management of certain aspects of the business, such as restocking of inventory and hiring and training new salespeople, more difficult.

Required

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

2. If Hank’s sells 20,000 hats, what is its before-tax income or loss? Support your answer by constructing a contribution income statement.

3. If Hank’s sells 32,000 hats, what is its margin of safety (MOS) and margin of safety ratio (MOS%)? Of what interpretive value are these two measures?

4. Hank is considering the elimination of sales commissions completely and increasing salaries by $106,500 annually. What would be the new breakeven point in units? What would be the before-tax income or loss if 20,000 hats are sold with the new salary plan?

5. Identify and discuss the strategic and ethical issues in the decision to eliminate sales commissions (see requirement 4). How do these strategic concerns affect Hank’s decision?