Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fash
ID: 2353766 • Letter: T
Question
Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fashionable stockings. Ms. Hall has just completed a course in managerial accounting, and she believes that she can apply certain aspects of the course to her business. She is particularly interested in adopting the cost- volume profit (CVP) approach to decision making. Thus, she has prepared the following analysis:
Sales price per pair of stockings . . . . . . . . . . . . . . . . . $2.00
Variable expense per pair of stockings . . . . . . . . . . . . 0.80
Contribution margin per pair of stockings . . . . . . . . . . $1.20
Fixed expense per year: Building rental . . . . . . . . . . . $12,000
Equipment depreciation . . . . . . . . . . . . . . . . . . . . . . 3,000
Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Total fixed expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000
Required:
1. How many pairs of stockings must be sold to break even? What does this represent in total dollar sales?
3. How many pairs of stockings must be sold to earn a $9,000 target profit for the first year?
4. Ms. Hall now has one full-time and one part-time salesperson working in the store. It will cost her an additional $8,000 per year to convert the part-time position to a full-time position. Ms. Hall believes that the change would bring in an additional $20,000 in sales each year. Should she convert the position? Use the incremental approach. (Do not prepare an income statement.)
5. Refer to the original data. Actual operating results for the first year are as follows: Sales . . . . . . . . . . . . . . . . . . . . . . $125,000
Variable expenses . . . . . . . . . . . . 50,000
Contribution margin . . . . . . . . . . . 75,000
Fixed expenses . . . . . . . . . . . . . . 60,000
Net operating income . . . . . . . . . . $ 15,000
a. What is the store
Explanation / Answer
1. pairs of stockings must be sold to break even = 12000+3000+15000+6000 / 1.2 = A Total dollar sales = 2xA answer 3. (Answer of 1) + 9000/1.2 4. No, it is not profitable in the long run see 20000 units cost 20000x.8 = 16000$ to company keeping everything same, 16000 expense > 8000 So NO, not justified 5. Sales = $125,000 Variable expenses 50,000 Contribution margin 75,000 Fixed expenses 60,000 Net operating income $ 15,000 Leverage = (125000 - 50000 - 75000 - 60000)/15000 = L with 20% rise, New Operating income will be (125000 - 50000 - 75000 - 60000)/(Lx1.2) So degree of leverage will increase by .2 and new Operating income can be found PLEASE RATE
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