CVP analysis, shoe stores. The WalkRite Shoe Company operates a chain of shoe stores that sell 10 different styles of inexpensive 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. WalkRite is considering opening another store that is expected to have the revenue and cost relationships shown here:
| 1 |
Unit Variable Data (per pair of shoes) |
|
Annual Fixed Costs |
|
| 2 |
Selling Price |
$30.00 |
|
Rent |
$60,000 |
| 3 |
Cost of shoes |
$19.50 |
|
Salaries |
200,000 |
| 4 |
Sales commission |
$1.50 |
|
Advertising |
80,000 |
| 5 |
Variable cost per unit |
$21.00 |
|
Other fixed costs |
20,000 |
| 6 |
|
|
|
|
|
Total fixed costs |
$360,000 |
Consider each question independently: Required
1. What is the annual breakeven point in (a) units sold and (b) revenues?
A) Break-even point in units = Fixed cost/(Selling price per unit - Variable cost per unit) $40,000 actually 40,000 units
B) Break-even point in revenue = Break-even point in units* selling price per pair $1,200,000
2. If 35,000 units are sold, what will be the store's operating income (loss)?
Contribution per unit = Selling price per unit - Variable cost per unit
$9.00
Total contribution = number of units that are sold* contribution per unit
$315,000
Operating income (loss) = Total contributions of units sold - Total fixed cost
($45,000)
3. If sales commissions are discontinued and fixed salaries are raised by a total of $81,000, what would be the annual breakeven point in (a) units sold and (b) revenues?
A) Total fixed costs = originally reported fixed costs + the raise in fixed salaries
$441,000
Break-even point in units = Fixed costs/(Selling price per unit - Variable cost per unit) $49,000 actually 49,000 units
B) Break-even point in revenues = Break-even point in units*selling price per pair
$1,470,000
4. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.30 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues?
A) Total variable cost per pair of shoes if manager is paid a commission of $.30 per unit sold = Orginal variable costs + managers commission
$21.30
Contibution per unit = Selling price per unit - Variable cost per unit $8.70
Break-even point in units = Fixed costs/(Selling price per unit - Variable cost per unit) $41,379.31 actually 41,380 units sold
B) Break-even point in revenues = Break-even in units sold*selling price per pair $1,241,400
5. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.30 per unit in excess of the breakeven point, what would be the store's operating income if 50,000 units were sold?
| Total revenue = number of shoes sold * selling price |
| $1,500,000 |
|
|
|
|
| Cost of shoes = number of shoes*cost of shoes per pair |
| $975,000 |
|
|
|
|
| Sales commission if $.30 per pair*number of shoes sold |
| $15,000 |
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
|
| Revenue |
|
|
$1,500,000 |
|
| Less: |
|
|
|
|
| Cost of shoes |
|
$975,000 |
|
|
| Sales commission |
$15,000 |
|
|
| Total fixed costs |
$360,000 |
|
|
| Total cost |
|
|
$150,000 |
|
| Operating income |
|
$1,350,000 |
|