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Fashion Shoe Co: Calculate Break Even, CVP Graph, Operating Income, & Commissions

The Fashion Shoe Company operates a chain of women's shoe shops around the country. The shops carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a substantial commission on each pair of shoes sold (in addition to a small basic salary) in order to encourage them to be aggressive in their sales efforts.

The following worksheet contains cost and revenue data for Shop 48 and is typical of the company's many outlets:

Required:
Per Shoe
Selling Price \$30.00

Variable expense
Invoice cost \$13.50
Sales commission \$4.40
Total Variable Cost \$18.00

Annual
Fixed Expense
Rent \$20,000
Salaries \$100,000
Total fixed cost \$150,000

Questions:
1. Calculate the annual break-even point in dollar sales and in unit sales for Shop 48.

2. 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.

3. If 12,000 pairs of shoes are sold in a year, what would be Shop 48's net operating income or loss?

4. The company is considering paying the store manager of Shop 48 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 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 50 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be the shop's net operating income or loss if 15,000 pairs of shoes are sold?

6. 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 the new break-even point in dollar sales and in unit sales for Shop 48? Would you recommend that the change be made? Explain.

Solution Summary

The solution compromises of 6 questions answered in an Excel attachment that deal with calculating a range of figures such as total variable cost, contribution margin, fixed cost, operating income/(loss) and the break-even point.

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