During the first year of business for your swimwear store called Zig Zag, you ha

Question

During the first year of business for your swimwear store called Zig Zag, you had 13,400 visitors, of whom 3,350 made purchases. The average transaction size was $38.00. The Zig Zag operates on a gross margin of 55 percent and has annual fixed operating expenses of $30,000.00. Variable cost were 15 percent of sales. The two primary fixed expenses are rent of $1,100 a month and salaries of $1,200 a month. You keep all profits in the business to reinvest in inventory and other immediate business needs.

Because your first year was profitable you are now considering remodeling the store. Your landlord will not help with these expenses. To paint the exterior would be $ 1,400, to tile the floor would be $1,600. New lighting and fixtures would be $ 4,000. You believe that these changes will increase traffic by 10 percent and that your closure or conversion rate will increase to 30 percent. Will your proposed changes pay for themselves the first year? Show all work.

Explanation / Answer

Y1 Total Sales = 3350*$38 = $127,300 Less Var costs = 15%* $127,300 = $19,095 -------------------------------------------------- Total COnt = $108,205 Less FOC = $30000 Less Fixed exp -Rent = 12*$1100 Less Fixed exp-Salary =12*$1200 ...........($57,600) --------------------------------------- Net Income = $50,605 ........................(A) In Y2, Extra Cost of remodelling = $1400+$1600+$4000 = $7,000 .....(X) Total Sales = (1.10*13400)*30%*$38 = $168,036 Less Var cost = 15%*$168,036 = $25,205 ------------------------------------------------ Total COnt = $142,831 Less Fixed costs (30000+12*1100+12*1200) = 57,600 -------------------------------------- Net Income in Y2 = $85,231 ............(B) So Net Inc in Y2-Net Inc in Y1 = B-A = $85,231 - $50,605 = $34,626 ...(Y) As Increase in Net Inc in Y2 (Y) is considerably greater than Cost of remodelling (X), the proposed changes have paid off in the year itself.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.