Chapter 3, Problem 3.44P

CVP analysis, shoe stores (continuation of 3-43). Refer to requirement 3 of Problem 3-43. In this problem, assume the role of the owner of HighStep.

1. 1. As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 10,000 units? What do you think of the motivational aspect of your chosen compensation plan?

Required

1. 2. Suppose the target operating income is $69,000. How many units must be sold to reach the target operating income under (a) the original salary-plus-commissions plan and (b) the higher-fixed-salaries-only plan? Which method would you prefer? Explain briefly.
2. 3. You open the new store on January 1, 2017, with the original salary-plus-commission compensation plan in place. Because you expect the cost of the shoes to rise due to inflation, you place a firm bulk order for 11,000 shoes and lock in the $37 price per unit. But toward the end of the year, only 9,500 shoes are sold, and you authorize a markdown of the remaining inventory to $50 per unit. Finally, all units are sold. Salespeople, as usual, get paid a commission of 5% of revenues. What is the annual operating income for the store?