Problem 5-28 I\'d like help with the following problem, but please explain how y

Question

Problem 5-28

I'd like help with the following problem, but please explain how you arrived at your answers. Thank you!

Problem 5-28 Graphing; Incremental Analysis; Operating Leverage [LO2, LO4, LO5,
LO6, LO8]

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 expense per year:
    Building rental                                                $ 12,936
    Equipment depreciation                                      3,234
    Selling                                                               32,340
    Administrative                                                    16,170
Total fixed expense                                              $ 64,680

Required:
1. How many pairs of stockings must be sold to break even? What does this represent in total
dollar sales? (Round "per unit" values to 2 decimal places and final answers to the
nearest whole number. Do not round other intermediate calculations. Omit the "$" sign
in your response.)

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 $10,000 target profit for the first year?
(Round the cost per unit to 2 decimal places and final answer to the nearest whole
number. Do not round other intermediate calculations.)

Unit sales to attain target profit               ____________pairs

4. Ms. Hall now 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 $25,000 in sales each
year. Should she convert the position? Use the incremental approach.
___No
___Yes

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                             64,680
Net operating income                 $ 23,520

a. What is the store’s degree of operating leverage? (Round your answer to 2 decimal places.)

Degree of operating leverage ______________

b. Ms. Hall is confident that with some effort she can increase sales by 27% next year. What would be the expected percentage increase in net operating income? Use the degree of
operating leverage concept to compute your answer. (Round your intermediate calculations and final answer to 2 decimal places. Omit the "%" sign in your response.)

Expected percentage increase in net operating income _____________%

Explanation / Answer

Solution:

3.

4.

Sales price 49 Less: Variable cost per stocking 19.6 Contribution per stocking 29.4 P/V ratio = contribution / sales * 100 60% 1 Break even in unit sales Break even in unit sales = Fixed cost / Contribution per unit Fixed cost 64,680 Contribution per stocking 29.4 Break even in unit sales = 2,200 units 2 Break even in dollar sales Break even in dollar sales= Fixed cost / P/v ratio Fixed cost 64,680 P/V ratio = contribution / sales * 100 60% Break even in dollar sales= 107,800

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