Chapter 6, Problem 30P

Graphing; Incremental Analysis; Operating Leverage 106−2, 106−4, L06−5, L06-6, 106−8

Angie Silva bas recently opened The Sandal Shop in Brisbane, Australia, 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:

Required:
1. What is the break-even point in unit sales and dollar sales?
2. Prepare a CVP graph or a profit graph for the store from zero pairs up to 4.000 pairs of sandals sold each sear. Indicate the break-even point on your graph.
3. Angie has decided that she must earn a profit of $18,000 the first year to justify her time and effort. How many pairs of sandals must be sold to attain this target profit?
4. Angie now has two salespersons working in the store−one full time and one part time. It will cost her an additional 58,000 per veer to convert the part-time position to a full-time position. Angie believes that the change would increase annual sales by $25,000. Should she convert the position’ Use the incremental approach. (Do not prepare an income statement.)
5. Refer to the original data. During the first year, the store sold only 3,000 pairs of sandals and reported the following operating results:

a. What is the store’s 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 50% next year. Using the degree of operating Ieverage, bat would be the expected percentage increase in net operating income if Angieis able to increase sales by 50%?