Question

Bubba’s Western Wear is a western hat retailer in Lubbock, Texas. Although Bubba’s carries numerous styles of western hats, each hat has approximately the same price and invoice (purchase) cost, as shown in the following table. Sales personnel receive a commission to encourage them to be more aggressive in their sales efforts. Currently, the Lubbock economy is really humming, and sales growth at Bubba’s has been great. The business is very competitive, however, and Bubba, the owner, has relied on his knowledgeable and courteous staff to attract and retain customers who otherwise might go to other western wear stores. Because of the rapid growth in sales, Bubba is also finding the management of certain aspects of the business more difficult, such as restocking inventory and hiring and training new salespeople. Sales price $ 80.00 Per unit variable expenses Purchase cost 43.50 Sales commissions 11.50 Total per unit variable costs $ 55.00 Total annual fixed expenses Advertising $ 98,500 Rent 146,500 Salaries 255,000 Total fixed expenses $ 500,000 Required: 1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars. 2. If Bubba’s sells 22,000 hats, what is its before-tax income or loss? Support your answer by preparing a contribution income statement. 3. If Bubba’s sells 32,000 hats, what is its margin of safety (MOS) and MOS ratio? 4. Bubba is considering the elimination of sales commissions completely and increasing salaries by $157,000 annually. What would be the new breakeven point in units? What would be the before-tax income or loss if 22,000 hats are sold with the new salary plan?

Answer 1

The answers are given below.Thanks

a	Break even point = 500000/(80-55) = 20000 Units
	Break even sales = 20000*80 = $1600000
b	Contribution margin income statement
	Sales (22000*80)	$1760000
	Less; Variable cost (22000*55)	$1210000
	Contribution margin	$550000
	Fixed cost	$500000
	Pretax income (loss)	$50000
c	Margin of safety = (32000-20000)*80 = $960000
	Margin of safety ratio = 960000/2560000 = 37.5%
d	New break even point = 657000/(80-43.50) = 18000 Units
	Before tax income (loss) = (80-43.50)*22000-657000 = $146000