The Fashion Shoe Company operates a chain of women\'s shoe shops around the coun
ID: 2369295 • Letter: T
Question
The Fashion Shoe Company operates a chain of women's shoe shops around the country. The shops 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 basic salary) in order to encourage them to be aggressive in their sales efforts.The following contains cost and revenue data for Shop 48 and is typical of the company's many outlets:
Per Pair of Shoes Selling price:$58.00
Variable expenses:
-Invoice cost: $27.00
-Sales commission: $10.60
Total variable expenses: $37.60
Annual Fixed expenses:
-Advertising: $108,530
-Rent: $207,060
-Salaries: $98,530
Total fixed expenses: $414,120
Requirement 1:
Calculate the annual break-even point in dollar sales and in unit sales for Shop 48.
Requirement 2:
If 19,000 pairs of shoes are sold in a year, what would be Shop 48's net operating income or loss?
Requirement 3:
The company is considering paying the store manager of Shop 48 an incentive commission of 70 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 dollar sales and in unit sales?
Explanation / Answer
1. contribution margin per unit = sale price - variable expenses = 58 - 37.60 = 20.40 Break even point in units = fixed expenses/conribution margin per unit = 414,120/20.40 = 20,300 units break even point in dollar sales = 20,300 units * $58.00 per unit = 1,177,400 2. 19,000 units * $20.40 contribution margin per unit = $387,600 Then subtract fixed expenses $387,600 - $414,120 = Loss of $26,520. 3. Variable expenses would be $37.60 + 0.70 = $38.30. Contribution marign per unit = 58 - 38.30 = $19.70 break even in units = fixed expenses/contribution margin per unit = 414,120/19.70 = 21,022 (rounded up). contribution margin in dollar sales = 21,022*58 = $1,219,276
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