Bubba's Western Cover is a western hat retailer in El Paso, Texas. Although Bubba's carries numerous styles of western hats, each hat has approximately the same price and invoice (purchase) cost, as shown in the following table. Sales personnel receive a commission to encourage them to be more aggressive in their sales efforts. Currently, the El Paso economy is really humming, and sales growth at Bubba's has been great. The business is very competitive, however, and Bubba, the owner, has relied on his knowledgeable and courteous staff to attract and retain customers who otherwise might go to other western hat stores. Because of the rapid growth in sales, Bubba is also finding the management of certain aspects of the business more difficult, such as restocking inventory and hiring and training new salespeople. Sales price Per unit variable expenses Purchase cost $ 80.00 34.50 Sales commissions 20.50 Total per unit variable costs Total annual fixed expenses Advertising Rent $ 55.00 $187,500 193,800 306, 250 Salaries Total fixed expenses $686,750 Required: 1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars. 2. If Bubba's sells 28,000 hats, what is its before-tax income or loss? Support your answer by preparing a contribution income statement. 3. If Bubba's sells 41,000 hats, what is its margin of safety (MOS) and MOS ratio?
Bubba's Western Cover is a western hat retailer in El Paso, Texas. Although Bubba's carries numerous styles of western hats, each hat has approximately the same price and invoice (purchase) cost, as shown in the following table. Sales personnel receive a commission to encourage them to be more aggressive in their sales efforts. Currently, the El Paso economy is really humming, and sales growth at Bubba's has been great. The business is very competitive, however, and Bubba, the owner, has relied on his knowledgeable and courteous staff to attract and retain customers who otherwise might go to other western hat stores. Because of the rapid growth in sales, Bubba is also finding the management of certain aspects of the business more difficult, such as restocking inventory and hiring and training new salespeople. Sales price Per unit variable expenses Purchase cost $ 80.00 34.50 Sales commissions 20.50 Total per unit variable costs Total annual fixed expenses Advertising Rent $ 55.00 $187,500 193,800 306, 250 Salaries Total fixed expenses $686,750 Required: 1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars. 2. If Bubba's sells 28,000 hats, what is its before-tax income or loss? Support your answer by preparing a contribution income statement. 3. If Bubba's sells 41,000 hats, what is its margin of safety (MOS) and MOS ratio?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Bubba's Western Cover is a western hat retailer in El Paso, Texas. Although Bubba's carries numerous styles of western hats, each hat
has approximately the same price and invoice (purchase) cost, as shown in the following table.
Sales personnel receive a commission to encourage them to be more aggressive in their sales efforts. Currently, the El Paso economy
is really humming, and sales growth at Bubba's has been great. The business is very competitive, however, and Bubba, the owner, has
relied on his knowledgeable and courteous staff to attract and retain customers who otherwise might go to other western hat stores.
Because of the rapid growth in sales, Bubba is also finding the management of certain aspects of the business more difficult, such as
restocking inventory and hiring and training new salespeople.
Sales price
Per unit variable expenses
24
80.00
Purchase cost
34.50
Sales commissions
20.50
Total per unit variable costs
$ 55.00
Total annual fixed expenses
Advertising
$187, 500
Rent
193, 000
Salaries
306, 250
Total fixed expenses
$686,750
Required:
1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars.
2. If Bubba's sells 28,000 hats, what is its before-tax income or loss? Support your answer by preparing a contribution income
statement.
3. If Bubba's sells 41,000 hats, what is its margin of safety (MOS) and MOS ratio?
4. Bubba is considering the elimination of sales commissions completely and increasing salaries by $234,625 annually. What would be
the new breakeven point in units? What would be the before-tax income or loss if 28,000 hats are sold with the new salary plan?
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