Cvp Analysis

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.

UNIT VARIABLE DATA (per pair of shoes)

Selling price $60

Cost of shoes 37

Sales commission 3

Variable cost per unit 40

ANNUAL FIXED COSTS

Rent $30,000

Salaries 100,000

Advertising 40,000

Other fixed costs 10,000

TOTAL FIXED COSTS $180,000

REQUIREMENTS:

Consider each question independently:

1. What is the annual breakeven point in (a) units sold and (b) revenues?

Contribution margin per unit = Selling price - Variable cost per unit

$60 - $40 = $20

a. Units sold = Fixed costs/Contribution margin per unit

$180,000/$20 = 9,000 Units sold

b. Revenue = Units sold x Selling price

9,000 x $60 = $540,000 Revenue

2. If 8,000 units are sold, what will be the store’s operating income (loss)?

Operating Income = [Units sold (Selling price - variable costs per unit)] - Fixed costs

[8,000 ($60 - $40)] - $180,000 = $(20,000)

The store has an operating income loss of $20,000.

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?

Contribution margin per unit = Selling price - Variable cost per unit

$60 - $37 = $23

Total fixed costs + Raised salaries

$180,000 + $15,500 = $195,500

$195,500/$23 = 8,500 Units sold

$60 x 8,500 = $510,000 Revenue

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...