CVP analysis, shoe stores. The HighStep Shoe Company operates ...

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CVP analysis, shoe stores.
 
  The HighStep Shoe Company operates a chain of shoe stores that sell 10 different styles of inexpensive men's shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. HighStep is considering opening another store that is expected to have the revenue and cost relationships shown here.
 
  Consider each question independently:
 
  Required:
  1. What is the annual breakeven point in (a) units sold and (b) revenues?
  2. If 8,000 units are sold, what will be the store's operating income (loss)?
  3. If sales commissions are discontinued and fixed salaries are raised by a total of 15,500, what would be the annual breakeven point in (a) units sold and (b) revenues?
  4. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of 2.00 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues?
  5. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of 2.00 per unit in excess of the breakeven point, what would be the store's operating income if 12,000 units were sold?

Question 2

Accounts Receivable is a(n)
 a. asset.
  b. liability.
  c. revenue.
  d. expense.

[SomethingSomething]

Answer to Question 1

1. CMU (SP  VCU = 60  40)  20.00
a. Breakeven units (FC CMU = 180,000 20 per unit) 9,000
b. Breakeven revenues
(Breakeven units SP = 9,000 units 60 per unit) 540,000

2. Pairs sold 8,000
Revenues, 8,000 60 480,000
Total cost of shoes, 8,000 37 296,000
Total sales commissions, 8,000 3 24,000
Total variable costs 320,000
Contribution margin 160,000
Fixed costs 180,000
Operating income (loss)  (20,000)

3. Unit variable data (per pair of shoes)
Selling price  60.00
Cost of shoes 37.00
Sales commissions 0
Variable cost per unit  37.00
Annual fixed costs
Rent  30,000
Salaries, 100,000 + 15,500 115,500
Advertising 40,000
Other fixed costs 10,000
Total fixed costs  195,500

CMU, 60  37  23
a. Breakeven units, 195,500 23 per unit 8,500
b. Breakeven revenues, 8,500 units 60 per unit 510,000

4. Unit variable data (per pair of shoes)
Selling price  60.00
Cost of shoes 37.00
Sales commissions 5.00
Variable cost per unit  42.00
Total fixed costs 180,000

CMU, 60  42  18.00
a. Break even units = 180,000 18 per unit 10,000
b. Break even revenues = 10,000 units 60 per unit 600,000

5. Pairs sold 12,000
Revenues (12,000 pairs 60 per pair) 720,000
Total cost of shoes (12,000 pairs 37 per pair) 444,000
Sales commissions on first 9,000 pairs (9,000 pairs 3 per pair) 27,000
Sales commissions on additional 3,000 pairs
3,000 pairs (3 + 2 per pair) 15,000
Total variable costs 486,000
Contribution margin 234,000
Fixed costs 180,000
Operating income  54,000

Alternative approach:

Breakeven point in units = 9,000 pairs
Store manager receives commission of 2 on 3,000 (12,000  9,000) pairs.
Contribution margin per pair beyond breakeven point of 9,000 pairs =
18 (60  40  2) per pair.
Operating income = 3,000 pairs 18 contribution margin per pair = 54,000.

Answer to Question 2

A