B. The XYZ Shoe Company operates a chain of shoe stores that sell 10 different styles of men's shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. XYZ is considering opening another store that is expected to have the revenue and cost relationship shown here: Unit Variable Data (per pair of shoes) Selling price Cost of shoes Sales commission Variable cost per unit Annual Fixed Costs P3,000.00 Rent 2,300.00 Salaries 100.00 Advertising P2,400.00 Other fixed cost P 600,000 2,000,000 800,000 200,000 3,600,000 Total fixed costs Required: 1. What is the annual breakeven point in (a) units sold and (b) revenues? 2. If 5,000 units are sold, what will be the store's operating income (loss)? 3. If sales commissions are discontinued and fixed salaries are raised by a total of P810,000, what would be the annual breakeven point in (a) units sold and (b) revenues? 4. Refer to the original data. If in addition to his fixed salary, the store manager is paid a commission of P30 per unit in excess of the break-even point, what would be the store's operating income if 10,000 units were sold.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Using the data from the attached picture, compute for the following:
1. If 5,000 units are sold, what will be the store’s operating income (loss)?
2. If sales commissions are discontinued and fixed salaries are raised by a total of
₱810,000, what would be the annual breakeven point in (a) units sold and (b) revenues?
3. Refer to the original data. If in addition to his fixed salary, the store manager is paid
a commission of ₱30 per unit in excess of the break-even point, what would be the store’s operating income if 10,000 units were sold.
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