Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. Angie has just received a degree in business and she is anxious to apply the principles she has learned to her business. In time, she hopes to open a chain of sandal shops. As a first step, she has prepared the following analysis for her new store:       Sales price per pair of sandals $ 2.00   Variable expenses per pair of sandals   1.20   Contribution margin per pair of sandals $ 0.80   Fixed expenses per year:       Building rental $ 9,000   Equipment depreciation   5,000   Selling   17,600   Administrative   18,000   Total fixed expenses $ 49,600           Required: 1. How many pairs of sandals must be sold each year to break even? What does this represent in total dollar sales?                 Break-even point in unit sales   pairs Break-even point in dollar sales     3. Angie has decided that she must earn at least $1,600 the first year to justify her time and effort. How many pairs of sandals must be sold to reach this target profit?       Unit sales to attain target profit   pairs   4. Angie now has two salespersons working in the store—one full time and one part time. It will cost her an additional $10,000 per year to convert the part-time position to a full-time position. Angie believes that the change would bring in an additional $32,000 in sales each year. Should she convert the position? Use the incremental approach.      Yes   No     5.Refer to the original data. During the first year, the store sold only 68,500 pairs of sandals and reported the following operating results:       Sales (68,500 pairs) $ 137,000   Variable expenses   82,200   Contribution margin $ 54,800   Fixed expenses   49,600   Net operating income $ 5,200           a.What is the store’s degree of operating leverage? (Round your answer to 2 decimal places.)       Degree of operating leverage     b. Angie is confident that with a more intense sales effort and with a more creative advertising program she can increase sales by 5% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage concept to compute your answer. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).       Expected percentage increase in net operating income   %

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. Angie has just received a degree in business and she is anxious to apply the principles she has learned to her business. In time, she hopes to open a chain of sandal shops. As a first step, she has prepared the following analysis for her new store:

 

   
Sales price per pair of sandals $ 2.00  
Variable expenses per pair of sandals   1.20  
Contribution margin per pair of sandals $ 0.80  
Fixed expenses per year:      
Building rental $ 9,000  
Equipment depreciation   5,000  
Selling   17,600  
Administrative   18,000  
Total fixed expenses $ 49,600  

 

 

 

 

Required:

1. How many pairs of sandals must be sold each year to break even? What does this represent in total dollar sales?

     

 
 
     
Break-even point in unit sales   pairs
Break-even point in dollar sales  


 

3. Angie has decided that she must earn at least $1,600 the first year to justify her time and effort. How many pairs of sandals must be sold to reach this target profit?

 

 
 
Unit sales to attain target profit   pairs

 

4. Angie now has two salespersons working in the store—one full time and one part time. It will cost her an additional $10,000 per year to convert the part-time position to a full-time position. Angie believes that the change would bring in an additional $32,000 in sales each year. Should she convert the position? Use the incremental approach.
 

 

  Yes
  No

 

 

5.Refer to the original data. During the first year, the store sold only 68,500 pairs of sandals and reported the following operating results:

 

   
Sales (68,500 pairs) $ 137,000  
Variable expenses   82,200  
Contribution margin $ 54,800  
Fixed expenses   49,600  
Net operating income $ 5,200  

 

 

 

 

a.What is the store’s degree of operating leverage? (Round your answer to 2 decimal places.)

 

 
 
Degree of operating leverage  


 

b. Angie is confident that with a more intense sales effort and with a more creative advertising program she can increase sales by 5% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage concept to compute your answer. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

 

 
 
Expected percentage increase in net operating income   %
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