Server Shirts sells blouses to hotels for their female servers. The blouses are
ID: 2465059 • Letter: S
Question
Server Shirts sells blouses to hotels for their female servers. The blouses are imported from Italy and are sold to customers throughout the United States at a profit. Sales representatives are paid a base salary plus a commission on their sales. Sales and expenses data is provided below:
Selling price per blouse
$80.00
Variable Expenses per blouse:
Cost of blouse
$36.00
Sales Commission
$14.00
Annual Fixed Expenses
Rent
$160,000
Marketing
$300,000
Salaries
$140,000
Required:
What is the contribution margin per unit?
What is the contribution margin percentage?
Compute the number of units that need to be sold in order to break-even.
If the manager is paid a commission of $6 per blouse (in addition to the sales representative’s commission) what will be the effect on the company’s break-even? Will they need to sell more or less units?
As an alternative to #4 above, the company is thinking it will pay a $6 commission to the manager on each blouse sold in excess (or above) the break-even point. What will be the effect of these changes on the net operating income or loss of the company if 23,500 blouses are sold in a year? (Hint: You will need to calculate the profit at this volume under the current situation in order to compare to this alternative).
Refer to the original data. What will the break-even point if the company eliminates all commissions and instead increases salaries by $214,000? Should the company make this change?
Selling price per blouse
$80.00
Variable Expenses per blouse:
Cost of blouse
$36.00
Sales Commission
$14.00
Annual Fixed Expenses
Rent
$160,000
Marketing
$300,000
Salaries
$140,000
Explanation / Answer
Contribution margin per unit = Selling price per unit - Variable expense per unit = $80 - $50 = $ 30
Contribution margin percentage = Contribution margin per unit / Selling price per unit = $ 30 / $ 80 x 100 = 37.5%
Break-even units = Total fixed cost / Contribution margin per unit = $ 600,000 / $ 30 = 20,000 units
If the manager is paid a commission of $ 6 per unit, Contribution margin per unit will change to $ ( 80-56) = $ 24
New break-even point in units = $ 600,000 / $ 24 = 25,000 units
If all commissions are eliminated, contribution margin per unit = $ 80 - $ 36 = $ 44
Break-even point =( $ 600,000 + $ 214,000) / 44 = 18,500 units.
Yes, the company should make this change as it leads to a lower break-even point.
$ $ Sales revenue ( 23,500 x $ 80) 1,880,000 Less Cost of blouse ( 23,500 x $ 36) 846,000 Sales Commision( 23,500 x 14 + 3,500 x 6) 350,000 1,196,000 Total fixed cost 600,000 Net operating income 84,000Related Questions
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