The Fashion Shoe Company operates a chain of women’s shoe shops that carry many

Question

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 substantial commission on each pair of shoes sold (in addition to a small base salary) in order to encourage them to be aggressive in their sales efforts.

     The following worksheet contains cost and revenue data for Shop 48 and is typical of the company’s many outlets:

1.Calculate the annual break-even point in unit sales and in dollar sales for Shop 48

2. If 15,500 pairs of shoes are sold in a year, what would be Shop 48’s net operating income or loss?

3. The company is considering paying the store manager of Shop 48 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 in dollar sales? (Do not round intermediate calculations. Round your final answers to the nearest whole number.

4.Refer to the original data. As an alternative to (4) above, the company is considering paying the 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 the shop’s net operating income or loss if 18,800 pairs of shoes are sold? (Do not round intermediate calculations.)

5. Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $33,300 annually.

If this change is made, what will be the new break-even point in unit sales and in dollar sales for Shop 48? (Do not round intermediate calculations.)

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 substantial commission on each pair of shoes sold (in addition to a small base salary) in order to encourage them to be aggressive in their sales efforts.

     The following worksheet contains cost and revenue data for Shop 48 and is typical of the company’s many outlets:

Per Pair of
Shoes   Selling price $ 30.00   Variable expenses:      Invoice cost $ 11.00      Sales commission 4.00        Total variable expenses $ 15.00 Annual   Fixed expenses:      Advertising $ 40,000      Rent 31,000      Salaries 175,000        Total fixed expenses $ 246,000

1.Calculate the annual break-even point in unit sales and in dollar sales for Shop 48

2. If 15,500 pairs of shoes are sold in a year, what would be Shop 48’s net operating income or loss?

3. The company is considering paying the store manager of Shop 48 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 in dollar sales? (Do not round intermediate calculations. Round your final answers to the nearest whole number.

4.Refer to the original data. As an alternative to (4) above, the company is considering paying the 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 the shop’s net operating income or loss if 18,800 pairs of shoes are sold? (Do not round intermediate calculations.)

5. Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $33,300 annually.

   a.

If this change is made, what will be the new break-even point in unit sales and in dollar sales for Shop 48? (Do not round intermediate calculations.)

Explanation / Answer

Selling price per unit 30 Less : Variable Cost 15 Contribution per unit 15 Total fixed expenses 246000 1) Break even point ( in units) = Fixed cost / Contribution per unit            = 246000 / 15            = 16400 units Break even point ( in dollars) = Break even point ( in units) * selling price               = 16400 * 30              = 492000 2) net operating income if 15500 pair are sold Sales ( 15500 * 30) 465000 Less : Variable cost ( 15500 * 15) 232500 Contribution 232500 Less : Fixed Cost 246000 Operating loss -13500 3) Selling price per unit 30 Less : Variable cost - initial 15 Additional sales commission 0.75 15.75 Contribution per unit 14.25 Total fixed expenses 246000 Break even point ( in units) = Fixed cost / Contribution per unit            = 246000 / 14.25            = 17263 units Break even point ( in dollars) = Break even point ( in units) * selling price               = 17263 * 30              = 517890 4) net operating income if 18800 pair are sold Sales ( 18800 * 30) 564000 Less : Variable cost ( 18800 * 15) 232500 Additional sales commission ( (18800 - 16400) * 0.50) 1200 Contribution 330300 Less : Fixed Cost 246000 Operating profit 84300 5) Selling price per unit 30 Less : Variable Cost 11 Contribution per unit 19 Total fixed expenses 279300 a) Break even point ( in units) = Fixed cost / Contribution per unit                                                         = 279300 / 19                                                         = 14700 units Break even point ( in dollars) = Break even point ( in units) * selling price                                                             = 14700 * 30                                                             = 441000

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