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# Breakeven Analysis and operating profits

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Shirts Unlimited operates a chain of shirt stores around the country. The stores carry many styles of shirts that are all sold at the same price. To encourage sales personnel to be aggressive in their sales efforts, the company pays a substantial sales commission on each shirt sold. Sales personnel also receive a small basic salary.

The following worksheet contains cost and revenue data for Store 36. These data are typical of the company's many outlets:
Per Shirt
Selling price \$ 40.00

Variable expenses:
Invoice cost \$18.00
Sales commission 7.00
Total variable expenses \$25.00

Annual
Fixed expenses:
Rent \$80,000
Salaries 70,000
Total fixed expenses \$300,000

Shirts Unlimited is a fairly new organization. The company has asked you, as a member of its planning group, to assist in some basic analysis of its stores and company policies.

Required:
1. Calculate the annual break-even point in dollar sales and in unit sales for Store 36.
2. Prepare a CVP graph showing cost and revenue data for Store 36 from zero shirts up to 30,000 shirts sold each year. Clearly indicate the break-even point on the graph.
3. If 19,000 shirts are sold in a year, what would be Store 36's net operating income or loss?
4. The company is considering paying the store manager of Store 36 an incentive commission of \$3 per shirt (in addition to the sales persons' commissions). If this change is made, what will be the new break-even point in dollar sales and in unit sales?
5. Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager a \$3 commission on each shirt sold in excess of the break-even point. If this change is made, what will be the store's net operating income or loss if 23,500 shirts are sold in a year?

6. Refer to the original data. The company is considering eliminating sales commissions entirely in its stores and increasing fixed salaries by \$107,000 annually.
a. If this change is made, what will be the new break-even point in dollar sales and in unit sales in Store 36?
b. Would you recommend that the change be made? Explain.

#### Solution Preview

Please refer attached file for better clarity of tables. Graphs are missing here.

Solution:

1. Calculate the annual break-even point in dollar sales and in unit sales forÂ Â Â  Store 36.
Variable costs=V=\$25
Selling Price=P=\$40
Fixed Costs=F=\$300,000
Breakeven Point sales in units=F/(P-V)=20000
Breakeven Point sales in dollars=Selling Price*BEP in units=\$800,000

2.Â  Prepare a CVP graph showing cost and revenue data for Store 36 from zero shirts up to 30,000 shirts sold each year.Â  Clearly indicate the break-even point on the graph.

Variable Costs=Variable Cost per unit*volume
Total Costs=Fixed Costs+Variable Costs
Total Revenue=Selling Price*Volume
Amount in dollars
Shirts Volume Fixed Costs Variable Costs Total Costs Revenue
0 300000 ...

#### Solution Summary

Solution describes the steps to find out breakeven sales and operating profits at given volumes of sales. It also studies effect of varying one variable on BEP and profitablity.

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