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CVP anylsis for The Shoe Company

The Shoe Company operates a chain of shoe stores. The stores sell ten
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. Walk Rite is trying to determine the
desirability of opening another store, which is expected to have the following revenue and cost
relationships:

Unit Variable Data
Selling Price $ 30.00
Cost of Shoes $ 19.50
Sales Commissions 1.50
Total variable costs $ 21.00
Annual fixed costs
Rent $ 60,000
Salaries 200,000
Advertising 80,000
Other fixed costs 20,000
Total fixed cots $360,000

(Consider each question independently)
1. What is the annual breakeven point in (a) units sold, and (b) revenues?
2. If35,000 units are sold, what will be the store's operating income (loss)?
3. If sales commissions were discontinued for individual salespeople in favor of an $ 81,000 increase in fixed salaries, what would be the annual breakeven point in (a) units sold, and (b) revenues?
4. Refer to the original data. If the store manager were paid $ 0.30 per unit sold in addition to his
current fixed salary, what would be the annual breakeven point in (a) units sold, and (b)
revenues?
5. Refer to the original data. If the store manager were paid $ 0.30 per unit commission on each
unit sold in excess of the breakeven point, what would be be the store's operating income if
50.000 units were sold? (This $ 0.30 is in addition to both the commission paid to the sal es
staff and the store manager's fixed salary.)
6. Calculate the number of units sold where the operating income under (a) a fixed-salary plan,
and (b) a lower fixed-salary and a commission plan (for salespeople only) would be equal.
Above that number of units sold, one plan would be more profıtable than the other; below that
number of units sold, the reverse would occur.
7. Compute the operating income or loss under each plan in requirement 1 at sales levels of (a)
50.000 units, and (b) 60.000 units.
8 Suppose the target operating income is $ 168.000. How many units must be sold to reach the
target under (a) the fixed-salary plan, and (b) the lower fixed-salary and commission plan?

Solution Preview

The Shoe Company operates a chain of shoe stores. The stores sell ten 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. Walk Rite is trying to determine the desirability of opening another store, which is expected to have the following revenue and cost relationships:

Unit Variable Data
Selling Price $ 30.00
Cost of Shoes $ 19.50
Sales Commissions 1.50
Total variable costs $ 21.00
Annual fixed costs
Rent $ 60,000
Salaries 200,000
Advertising 80,000
Other fixed costs 20,000
Total fixed cots $360,000

(Consider each question independently)
1. What is the annual breakeven point in (a) units sold, and (b) revenues?

Breakeven point in units = Total Fixed cost/Contribution ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the annual breakeven point in (a) units sold, and (b) revenues.

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