Tom has recently opened The Sandal Shop in Warsaw (a store that specializes in fashionable sandals). In time, she hopes to open a chain of sandal shops. As a first step, she has gathered the following data for her new store: Sales price per pair of sandals $ 50,00 Variable expenses per pair of sandals $ 25,00 Contribution margin per pair of sandals $ 25,00 Fixed expenses per year: Building rental $ 14 000,00 Equipment depreciation $ 6 500,00 Selling $ 15 000,00 Administrative $ 19 500,00 Total fixed expenses $ 55 000,00 Required: 1. What is the break-even point in unit sales and dollar sales? (Please interpret gained result) 2. Anna has decided that she must earn a profit of $20,000 the first year to justify her time and effort. How many pairs of sandals must be sold to attain this target profit? 3. Anna now has two salespersons working in the store—one full time and one part time. It will cost her an additional $9,500 per year to convert the part-time position to a full-time position. Anna believes that the change would increase annual sales by $40,000. Should she convert the position? (Do not prepare an income statement.) 4. Refer to the original data. During the first year, the store sold only 3,000 pairs of sandals and reported the following operating results: Sales (3,000 pairs) $ 150 000,00 Variable expenses $ 75 000,00 Contribution margin $ 75 000,00 Fixed expenses $ 55 000,00 Net operating income $ 20 000,00 a. What is the store’s degree of operating leverage? (Please interpret gained result) b. Anna is confident that with a more intense sales effort and with a more creative advertising program she can increase unit sales by 30% next year. Using the degree of operating leverage, what would be the expected percentage increase in net operating income if Anna is able to increase unit sales by 30%?
Tom has recently opened The Sandal Shop in Warsaw (a store that specializes in fashionable sandals). In time, she hopes to open a chain of sandal shops. As a first step, she has gathered the following data for her new store:
|
Sales price per pair of sandals |
$ 50,00 |
|
Variable expenses per pair of sandals |
$ 25,00 |
|
Contribution margin per pair of sandals |
$ 25,00 |
|
Fixed expenses per year: |
|
|
Building rental |
$ 14 000,00 |
|
Equipment |
$ 6 500,00 |
|
Selling |
$ 15 000,00 |
|
Administrative |
$ 19 500,00 |
|
Total fixed expenses |
$ 55 000,00 |
Required:
1. What is the break-even point in unit sales and dollar sales? (Please interpret gained result)
2. Anna has decided that she must earn a profit of $20,000 the first year to justify her time and effort. How many pairs of sandals must be sold to attain this target profit?
3. Anna now has two salespersons working in the store—one full time and one part time. It will cost her an additional $9,500 per year to convert the part-time position to a full-time position. Anna believes that the change would increase annual sales by $40,000. Should she convert the position? (Do not prepare an income statement.)
4. Refer to the original data. During the first year, the store sold only 3,000 pairs of sandals and reported the following operating results:
|
Sales (3,000 pairs) |
$ 150 000,00 |
|
Variable expenses |
$ 75 000,00 |
|
Contribution margin |
$ 75 000,00 |
|
Fixed expenses |
$ 55 000,00 |
|
Net operating income |
$ 20 000,00 |
a. What is the store’s degree of operating leverage? (Please interpret gained result)
b. Anna is confident that with a more intense sales effort and with a more creative advertising program she can increase unit sales by 30% next year. Using the degree of operating leverage, what would be the expected percentage increase in net operating income if Anna is able to increase unit sales by 30%?
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