Question

Bubba's Western Wear is a western hat retaliler in as shown in the tollowing table. Sales personnel recelve a commission to encourage them to be more growth at Bubba's has been great. The business is very competitive, however, and Bubba, the Lubbock Texas. Although Bubbas carries numerous styles of westen hats, each hat has approximately the same aggressive in ther sales efforts Currently, the Lubbock economy is realy humming, and sales price and invoice (purchase) cost owner, has relied on his knowledgeable and courteous staft to attract and retain customers who otherwise ht go to other westem wear stores. Because of the rapid growth in sales, Bubba is also tnding the management of certain aspects of the business more dmkult, such as restocking inventory and hiring and training new salespeople Sales price Per unit variable expenses Sales commissions Total per unit variable costs Total annual fxed expenses S 80.00 43.50 S 55 00 5 98.500 Purchase cost Adverising Rent Salaries 146.500 Total fixed expenses 5 500,000 Required: 1 Calculate the annual breakeven point, both in terms of units and in terms of sales dolars 2. If Bubba's sells 22.000 hats, what is its before-tax income or oss? Support your answer by preparing a contribution income statement з Bubba s sells 32 000 hats. what is its margin of safety (MOS) and MOS ratio? easing saares by S157 000 annually what would be the new breakeven pon mi urns? what vould be me bet reas income or loss if 22,000 hats are sold with the new salary plan?

Answer 1

Answer 1
Break even point in units = Total fixed expenses / [Selling price per unit - Variable cost per unit]
Break even point in units = $500,000 / [$80 - $55] = 20,000 units
Break even point in sales dollars = Break even point in units * Selling price per unit = 20,000 units * $80 = $16,00,000
Answer 2
Calculaton of before tax income or loss if Bubba's sells 22000 hats
Contribution Income statement
Sales [22000 hats * $80]	$1,760,000.00
Less : Variable expenses [22000 hats * $55]	$1,210,000.00
Contribution Margin	$550,000.00
Less : Fixed Expenses	$500,000.00
Before tax Income	$50,000.00
Answer 3
Margin of safety = Actual sales - Break even sales
Margin of safety = [32000 hats * $80] - $16,00,000 = $9,60,000
Margin of safety ratio = [ Actual sales - Break even sales]/Actual sales = $9,60,000 / $25,60,000 = 37.50%
Answer 4
Break even point in units = Total fixed expenses / [Selling price per unit - Variable cost per unit]
Revised Total fixed expenses = $500000 + $157000 = $6,57,000
Revised variable cost per unit = $55 - $11.50 = $43.50
New Break even point in units = $6,57,000 / [$80 - $43.50] = 18000 units
Calculaton of before tax income or loss if Bubba's sells 22000 hats under new salary plan
Contribution Income statement
Sales [22000 hats * $80]	$1,760,000.00
Less : Variable expenses [22000 hats * $43.50]	$957,000.00
Contribution Margin	$803,000.00
Less : Fixed Expenses	$657,000.00
Before tax Income	$146,000.00