Bubba\'s Western Wear is a western hat retailer in Lubbock, Texas. Although Bubb

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 Per unit variable expenses $ 80.00 Purchase cost Sales commissions 41.58 13.58 $ 55.80 Total per unit variable costs Total annual fixed expenses Advertising Rent Salaries $117,580 158,88e 264,256 $539,75e Total fixed expenses 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 34,000 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 $172,500 annually. What would be the new breakeven point in units? What would be the before-tax income or loss if 22,000 hats are sold with the new salary plan?

Explanation / Answer

Unit contribution margin = 80-55 = $25 1 Breakeven point = Fixed expenses/Unit contribution margin Breakeven point In units 21590 =539750/25 In dollars 1727200 =21590*80 2 Before tax income or loss 10250 =(22000*25)-539750 Sales 1760000 =22000*80 Less: Variable costs 1210000 =22000*55 Contribution Margin 550000 Less: Fixed costs 539750 Operating income 10250 3 Margin of safety = Actual sales-Break even sales Margin of safety(MOS) 12410 =34000-21590 MOS ratio 36.5% =12410/34000 4 Revised contribution margin = 80-41.5= $38.5 Revised fixed costs = 539750+172500= $712250 New breakeven point in units 18500 =712250/38.5 Before tax income or loss 134750 =(22000*38.5)-712250

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