Jim Sandalwood has recently opened The Sandal Hut in Brisbane, Australia, a stor

Question

Jim Sandalwood has recently opened The Sandal Hut in Brisbane, Australia, a store that specializes in fashionable sandals. Jim has just received a degree in business and he is anxious to apply the principles he has learned to his business. In time, he hopes to open a chain of sandal shops. As a first step, he has prepared the following analysis for his new store: Sales price per pair of sandals Variable expense per pair of sandals S 2.00 1.20 Contribution margin per pair of sandals S 0.80 Fixed expense per year: Building rental Equipment depreciation Selling Administrätive $ 9,000 5,000 17,600 18,000 Total fixed expense $49.600

Explanation / Answer

              1.Break Even Point in units Fixed Cost /Contribution per unit = 49,600/0.80

= 62,000 units

              Contribution Margin = Contribution per unit/Sales x 100 = 40 %

                2. Break Even Point in $ = Fixed cost/Contribution Margin % = 49,600/40 % = $ 124,000

3. Unit sales to target profit = Fixed cost + Target Profit

= 49,600 + 1,600/0.8 = 64,000 units

               

4. As per incremental approach, if the incremental revenue exceeds incremental cost we should go ahead and convert part timer to full timer.

Answer : Yes

5. Degree of operating leverage = Contribution /Operating Income

                                                                = 54,800/5,200 = 10.538

6. Degree of operating leverage = Change in operating income/Change in sales

                                                                10.538 = Change in operating income/5

                                                                Change in operating income=10.538 x 5=52.962%

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