CVP, alternative cost structures.  Classical Glasses operates a kiosk at the local mall, selling sunglasses for $30 each. Classical Glasses currently pays $1,000 a month to rent the space and pays two full-time employees to each work 160 hours a month at $10 per hour. The store shares a manager with a neighboring kiosk and pays 50% of the manager’s annual salary of $60,000 and benefits of $12,000. The wholesale cost of the sunglasses to the company is $10 a pair.Required:How many sunglasses does Classical Glasses need to sell each month to break even?If Classical Glasses wants to earn an operating income of $5,300 per month, how many sunglasses does the store need to sell?If the store’s hourly employees agreed to a 15% sales-commission-only pay structure, instead of their hourly pay, how many sunglasses would Classical Glasses need to sell to earn an operating incomeof $5,300?Assume Classical Glasses pays its employees hourly under the original pay structure, but is able to pay the mall 10% of its monthly revenue instead of monthly rent. At what sales levels would Classical Glasses prefer to pay a fixed amount of monthly rent, and at what sales levels would it prefer to pay 10% of its monthly revenue as rent

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Asked Dec 20, 2019
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CVP, alternative cost structures.  Classical Glasses operates a kiosk at the local mall, selling sunglasses for $30 each. Classical Glasses currently pays $1,000 a month to rent the space and pays two full-time employees to each work 160 hours a month at $10 per hour. The store shares a manager with a neighboring kiosk and pays 50% of the manager’s annual salary of $60,000 and benefits of $12,000. The wholesale cost of the sunglasses to the company is $10 a pair.

Required:

  1. How many sunglasses does Classical Glasses need to sell each month to break even?
  2. If Classical Glasses wants to earn an operating income of $5,300 per month, how many sunglasses does the store need to sell?
  3. If the store’s hourly employees agreed to a 15% sales-commission-only pay structure, instead of their hourly pay, how many sunglasses would Classical Glasses need to sell to earn an operating incomeof $5,300?
  4. Assume Classical Glasses pays its employees hourly under the original pay structure, but is able to pay the mall 10% of its monthly revenue instead of monthly rent. At what sales levels would Classical Glasses prefer to pay a fixed amount of monthly rent, and at what sales levels would it prefer to pay 10% of its monthly revenue as rent
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Expert Answer

Step 1

1

Compute units of sunglasses to be sold to reach break-even point.

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Fixed cost Break-even units Contribution margin per unit $46, 200 Break-even point $20 pe unit = 2,310 units Working Note: Calculation of contribution margin per unit: Contribution margin per unit = Revenue – Variable cost = $30 – $10 = $20 per unit Calculation of fixed cost: Fixed cost = Rent + Salaries+Salary of neighboring stores manager +Benefits = S1,000 + (2x160×10)+(50% × 60,000) +12,000 = $1,000 + $3, 200 + $30,000 + $12, 000 = $46, 200

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Step 2

2.

Compute number of Sunglasses to be sold to earn operating income of $5,300 per month.

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Operating income =[Contribution margin per unit x Expected sales – Fixed cost] $5,300 = [S20 per unit xExpected sales – $46, 200] $5,300 + $46, 200 Expected sales = $20 per unit = 2,575 sunglasses Working Note: Calculation of contribution margin per unit: Contribution margin per unit = Revenue - Variable cost = $30 – S10 = $20 per unit Calculation of fixed cost: Fixed cost = Rent + Salaries+Salary of neighboring stores manager +Benefits = $1,000 + (2x160×10)+(50% × 60,000) +12,000 = $1,000 + $3, 200 + $30,000 + $12, 000 = $46, 200 %3D

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Step 3

3.

Compute number of Sunglasses to be sold to earn operating inc...

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Fixed cost + Target operating income Units to be sold %3D Contribution margin per unit S43, 000 + $5,300 Units to be sold = $15.50 $48, 300 $15.50 = 3,116 sunglasses Working Note: Calculation of contribution margin per unit: Contribution margin per unit = Revenue – Variable cost = $30 – $14.50 = $15.50 per unit Calculation of fixed cost: Fixed cost = Rent + Salary of neighboring stores manager +Benefits = $1,000 +(50%x 60, 000) +12,000 = $1,000 +$30,000 +$12,000 = S43, 000

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