Author Question: CVP, alternative cost structures. SuperShades operates a kiosk at the local mall, selling ... (Read 57 times)

Kikoku · **on:** Jul 6, 2018

CVP, alternative cost structures.

SuperShades operates a kiosk at the local mall, selling sunglasses for 20 each. SuperShades currently pays 800 a month to rent the space and pays two full-time employees to each work 160 hours a month at 10 per hour. The store shares a manager with a neighboring mall and pays 50 of the manager's annual salary of 40,000 and benefits equal to 20 of salary. The wholesale cost of the sunglasses to the company is 5 a pair.

Required:
1. How many sunglasses does SuperShades need to sell each month to break even?
2. If SuperShades wants to earn an operating income of 4,500 per month, how many sunglasses does the store need to sell?
3. If the store's hourly employees agreed to a 15 sales-commission-only pay structure, instead of their hourly pay, how many sunglasses would SuperShades need to sell to earn an operating income of 4,500?
4. Assume SuperShades pays its employees hourly under the original pay structure, but is able to pay the mall 8 of its monthly revenue instead of monthly rent. At what sales levels would SuperShades prefer to pay a fixed amount of monthly rent, and at what sales levels would it prefer to pay 8 of its monthly revenue as rent?

Question 2

The effect of expenses on the fundamental accounting equation is a(n)
a. increase to assets.
b. decrease to owner's equity.
c. increase to liabilities.
d. increase to owner's equity.

rekilledagain · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1. Variable cost per unit = 5
Contribution margin per unit = Selling price Variable cost per unit
= 20 5 = 15
Fixed Costs:
Manager's salary (40,000 1.20 0.5) 12 2,000 per month
Rent 800 per month
Hourly employee wages (2 160 hours 10) 3,200 per month
Total fixed costs 6,000 per month

Breakeven point = Fixed costs Contribution margin per unit
= 6,000 15 = 400 sunglasses (per month)

2. Target number of sunglasses =

=

3. Contribution margin per unit = Selling price Variable cost per computer
= 20 0.15 20 5 = 12
Fixed costs = Manager's salary + Rent = 2,000 + 800 = 2,800

Target number of sunglasses =
= (rounded up)

4. Let be the number of sunglasses for which SuperShades is indifferent between paying a monthly rental fee for the retail space and paying an 8 commission on sales. SuperShades will be indifferent when the operating income under the two alternatives are equal.

20 5 6,000 = 20 5 20 (0.08) 5,200
15 6,000 = 13.40 5,200
1.60 = 800
= 500 sunglasses

For sales between 0 and 500 sunglasses, SuperShades prefers to pay the 8 commission because in this range, 13.40 5,200 > 15 6,000. For sales greater than 500 sunglasses, the company prefers to pay the monthly fixed rent of 800 because 15 6,000 > 13.40 5,200.

Answer to Question 2

B