The Fashion Shoe Company operates a chain of women’s shoe shops that carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a sales commission on each pair of shoes sold plus a small base salary. The following data pertains to Shop 48 and is typical of the company’s many outlets: Per Pair of Shoes Selling Price $30 Variable Expenses: Invoice Cost 13.50 Sales Commission 4.50 --------- Total Variable Expenses $ 18.00 Annual Fixed Expenses: Advertising $ 30,000 Rent 20,000 Salaries 100,000 --------------- Total Fixed Expenses $ 150,000 Required: a. What is Shop 48’s annual break-even point in unit sales and dollar sales? b. Prepare a CVP graph showing cost and revenue data for Shop 48 from zero shoes up to 17,000 pairs of shoes sold each year. Clearly indicate the break-even point on the graph. c. If 12,000 pairs of shoes are sold in a year, what would be Shop 48’s net operating income (loss)?
: The Fashion Shoe Company operates a chain of women’s shoe shops that carry many styles of
shoes that are all sold at the same price. Sales personnel in the shops are paid a sales commission on each pair of shoes sold plus a
small base salary.
The following data pertains to Shop 48 and is typical of the company’s many outlets:
Per Pair of
Shoes
Selling Price $30
Variable Expenses:
Invoice Cost 13.50
Sales Commission 4.50
---------
Total Variable Expenses $ 18.00
Annual
Fixed Expenses:
Advertising $ 30,000
Rent 20,000
Salaries 100,000
---------------
Total Fixed Expenses $ 150,000
Required:
a. What is Shop 48’s annual break-even point in unit sales and dollar sales?
b. Prepare a CVP graph showing cost and revenue data for Shop 48 from zero shoes up to 17,000
pairs of shoes sold each year. Clearly indicate the break-even point on the graph.
c. If 12,000 pairs of shoes are sold in a year, what would be Shop 48’s net operating income
(loss)?
d. If this year’s sales increase by $75,000 and fixed expenses do not change, how much will net
operating income increase?
e. The company is considering paying the Shop 48 store manager an incentive commission of
75 cents per pair of shoes (in addition to the salesperson’s commission). If this change is
made, what will be the new break-even point in unit sales and dollar sales?
f. Refer to the original data. As an alternative to (e) above, the company is considering paying
the Shop 48 store manager 50 cents commission on each pair of shoes sold in excess of the
break-even point. If this change is made, what will be Shop 48’s net operating income (loss) if
15,000 pairs of shoes are sold?
g. Refer to the original data. The company is considering eliminating sales commissions entirely
in its shops and increasing fixed salaries by $31,500 annually. If this change is made, what
will be Shop 48’s new break-even point in unit sales and dollar sales? Would you recommend
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