Sadie May has decided to start a business where she will sell a single line of high heel shoes. Sadie will sell each pair of heels for $60 and will purchase the shoes from a supplier for $30 per pair. The supplier has offered Sadie two shipping options: either (1) Sadie can pay $5 per pair of heels ordered or (2) Sadie can pay a flat shipping cost of $500 per month regardless of the number of pairs ordered. All of Sadie’s sales will be made online. The cost to maintain and manage her website will be $750 per month. In addition, Sadie will rent a small space to store inventory for $250 per month. Sadie does not expect any additional costs in her operations as long as she does not sell more than 150 pairs of heels per month. Which of the following statements is incorrect? A. Shipping option 2 is a riskier cost structure for Sadie. B. At a monthly sales volume of 100 pairs of shoes, Sadie will be indifferent between the two shipping options. C. If annual sales revenue is $54,000, Sadie’s operating income will be higher under option 1 than it is under option 2. D. Sadie’s monthly breakeven point under shipping option 1 is 40 pairs of shoes. E. Sadie’s annual breakeven sales revenue under shipping option 2 is $12,000.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Sadie May has decided to start a business where she will sell a single line of high heel shoes. Sadie will sell each pair of heels for $60 and will purchase the shoes from a supplier for $30 per pair. The supplier has offered Sadie two shipping options: either (1) Sadie can pay $5 per pair of heels ordered or (2) Sadie can pay a flat shipping cost of $500 per month regardless of the number of pairs ordered.

All of Sadie’s sales will be made online. The cost to maintain and manage her website will be $750 per month. In addition, Sadie will rent a small space to store inventory for $250 per month. Sadie does not expect any additional costs in her operations as long as she does not sell more than 150 pairs of heels per month.

Which of the following statements is incorrect?

Shipping option 2 is a riskier cost structure for Sadie.

At a monthly sales volume of 100 pairs of shoes, Sadie will be indifferent between the two shipping options.

If annual sales revenue is $54,000, Sadie’s operating income will be higher under option 1 than it is under option 2.

Sadie’s monthly breakeven point under shipping option 1 is 40 pairs of shoes.

Sadie’s annual breakeven sales revenue under shipping option 2 is $12,000.

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