Cvp Analysis Problem 3-38 Continuation

CVP analysis, shoe stores refer to requirement 3 of Problem 3-38. In this problem, assume the role of the owner of Walk Rite. If you want to use Excel to solve this problem, go to the Excel Lab at www.prenhall.com/horngren/cost13e and download the template for Problem 3-38.

1. Calculate the number of units sold at which the owner of Walk Rite would be indifferent between the original salary-plus-commissions plan for salespeople and the higher fixed-salaries-only plan.

2. As owner, which sales compensation plan would you choose if to recasted annual sales of the new store were at least 55,000 units? What do you think of the motivational aspect of your chosen compensation plan?

3. Suppose the target operating income is $168,000. How many units must be sold to reach the target operating income under (a) the original salary-plus-commissions plan and (b) the higher-fixed-salaries-only plan?

4. You open the new store on January 1, 2008, with the original salary-plus-commission compensation plan in place. Because you expect the cost of the shoes to rise due to inflation, you place a firm bulk order for 50,000 shoes and lock in the $19.50 price per unit Rut, toward the end of the yea only 48,000 shoes are sold, and you authorize a markdown of the remaining inventory to $18 per unit. Finally, all units are sold. Salespeople, as usual, get paid a commission of 5% of revenues. What is the annual operating income for the store?

SOLUTION

CVP analysis, shoe stores

|  |Salaries + Commission Plan |Higher Fixed Salaries Only |  |

|No. of units |CM |CM |Fixed |Operating Income |CM |CM |Fixed Costs |Operating Income |Difference in favor of |

|sold |per Unit | |Costs | |per Unit |...