Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fash

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= $49.00
Variable expense per pair of stockings= 19.60

Contribution margin per pair of stockings= $29.40

Fixed expenses per year:
Building rental= $12,348
Equipment depreciation= 3,087
Selling= 30,870
Administrative= 15,435

Total fixed expense= $61,740




1. How many pairs of stockings must be sold to break even? What does this represent in total dollar sales?
Break-even point in unit sales=_____ pairs
Break-even point in dollar sales= $______


3. How many pairs of stockings must be sold to earn a $14,000 target profit for the first year?
Unit sales to attain target profit=____ pairs


4. Ms. Hall has one full-time and one part-time salesperson working in the store. It will cost her an additional $10,600 per year to convert the part-time position to a full-time position. Ms. hall believes that the change would bring in an additional $24,000 in sales each year. Should she convert the position? Use the incremental approach.



5. Refer to the original data. Actual operating results for the first year are as follows:

Sales= $147,000
Variable Expenses= 58,800

Contribution Margin= 88,200
Fixed expenses= 61,740

Net operating income=$26,460



a) what is the store's degree of operating leverage?

b)Ms hall is confident that with some effort she can increase sales by 29% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage concept to compute your answer.

Explanation / Answer

At Break even sales revenue = Costs X(49)=61740+19.60*X X=2100 so 1>2100 pairs and 102900$ X(49) -14000 = 61740+19.60X ====> X=2577 pairs 3> 2577 pairs additional sales = 490 pairs sales=150283 cost=131839 profit=18443 4>so she can ceratinly convert the part timer to full timer. 5>a>operating leverage =FC/TC =61740/)61740+58800)=0.512 b>change in operating income = change in sales *Operating leverage =0.512*29=14.8% cheers :)

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