Question

Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. In time, she hopes to open a chain of sandal shops. As a first step, she has gathered the following data for her new store:

Sales price per pair of sandals	$	40
Variable expenses per pair of sandals		20
Contribution margin per pair of sandals	$	20
Fixed expenses per year:
Building rental	$	10,000
Equipment depreciation		8,000
Selling		8,000
Administrative		14,000
Total fixed expenses	$	40,000
1. What is the break-even point in unit sales and dollar sales?

3. Angie has decided that she must earn a profit of $20,000 the first year to justify her time and effort. How many pairs of sandals must be sold to attain this target profit?

4. Angie now has two salespersons working in the store—one full time and one part time. It will cost her an additional $8,000 per year to convert the part-time position to a full-time position. Angie believes that the change would increase annual sales by $48,000. Should she convert the position? Use the incremental approach.

5. Refer to the original data. During the first year, the store sold only 4,000 pairs of sandals and reported the following operating results:

Sales (4,000 pairs)	$	160,000
Variable expenses		80,000
Contribution margin		80,000
Fixed expenses		40,000
Net operating income	$	40,000

a. What is the store’s degree of operating leverage?

b. Angie is confident that with a more intense sales effort and with a more creative advertising program she can increase sales by 50% next year. Using the degree of operating leverage, what would be the expected percentage increase in net operating income if Angie is able to increase sales by 50%?

Answer 1

(1) BEP:-

In units:- Fixed cost/Contribution pu

   = 40000/20 = 2000 sandals

In $:- 2000 sandals * SP

    = 2000 * 40 = $ 80000

(3) Target Profit = 20000

Let X be the sandals sold to achieve target profit

X * (SP – VC) – FC = 20000

X * (40 – 20) – 40000 = 20000

X = 3000 units

(4)

Increase Sale	48000
Increase contribution (48000 * 50%) (A)	24000
Additional Cost (B)	8000
Benefit (A-B)	16000

Yes she should convert the position

(5) (a) DOL = Contribution Margin/ operating income

                 = 80000/40000 = 2

(b) Sale Increase 50%

%age increase in Operating Income = 50%* 2 = 100%