Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. Angie has just received a degree in business and she is anxious to apply the principles she has learned to her business. In time, she hopes to open a chain of sandal shops. As a first step, she has prepared the following analysis for her new store:
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|
Sales price per pair of sandals |
$ |
2.00 |
|
Variable expenses per pair of sandals |
|
1.20 |
|
Contribution margin per pair of sandals |
$ |
0.80 |
|
Fixed expenses per year: |
|
|
|
Building rental |
$ |
9,000 |
|
Equipment depreciation |
|
5,000 |
|
Selling |
|
17,600 |
|
Administrative |
|
18,000 |
|
Total fixed expenses |
$ |
49,600 |
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|
Required:
1. How many pairs of sandals must be sold each year to break even? What does this represent in total dollar sales?
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|
|
|
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Break-even point in unit sales |
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pairs |
Break-even point in dollar sales |
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3. Angie has decided that she must earn at least $1,600 the first year to justify her time and effort. How many pairs of sandals must be sold to reach this target profit?
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Unit sales to attain target profit |
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pairs |
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4. Angie now has two salespersons working in the store—one full time and one part time. It will cost her an additional $10,000 per year to convert the part-time position to a full-time position. Angie believes that the change would bring in an additional $32,000 in sales each year. Should she convert the position? Use the incremental approach.
5.Refer to the original data. During the first year, the store sold only 68,500 pairs of sandals and reported the following operating results:
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|
Sales (68,500 pairs) |
$ |
137,000 |
|
Variable expenses |
|
82,200 |
|
Contribution margin |
$ |
54,800 |
|
Fixed expenses |
|
49,600 |
|
Net operating income |
$ |
5,200 |
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|
a.What is the store’s degree of operating leverage?(Round your answer to 2 decimal places.)
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Degree of operating leverage |
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b. Angie is confident that with a more intense sales effort and with a more creative advertising program she can increase sales by 5% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage concept to compute your answer.Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).
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Expected percentage increase in net operating income |
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% |
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