Cost-Volume-Profit Analysis

Chapter 3 – Cost-Volume-Profit Analysis

1. The WalkRite 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. WalkRite is considering opening another store that is expected to have the revenue and cost relationships shown here:

Unit Variable Data Annual Fixed Costs

Selling Price $30.00 Rent $ 60,000

Cost of Shoes 19.50 Salaries 200,000

Sales Commission (5%) 1.50 Advertising 80,000

Variable Cost per Unit $21.00 Other Fixed Costs 20,000

Total Fixed Costs $360,000

Consider each question independently:

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

b) If 35,000 units are sold, what will be the store’s operating income (loss)?

c) If sales commissions are discontinued and fixed salaries are raised by a total of $81,000, what would be the annual breakeven point in (a) units sold and (b) revenues?

d) If, in addition to his fixed salary, the store manager is paid a commission of $0.30 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues?

e) If, in addition to his fixed salary, the store manager is paid a commission of $0.30 per unit in excess of the breakeven point, what would be the store’s operating income if 50,000 units were sold?

f) Refer to (c) above and assume you are the owner of WalkRite:

1) Calculate the number of units sold at which you would be indifferent between the original salary-plus-commissions plan for salespeople and the higher fixed-salaries-only plan. Prove your solution works by preparing a contribution margin income statement for each alternative.

2) Which sales compensation plan would you choose if forecasted annual sales of...