Question

HOMEWORK 3 CHAPTER3 Question 5 [of 5) Save & Exit Submit 3.80 points Angie Silva has receniy 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 leamed 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: 096 224 Contrbution margin per pair of sandals Fixed expenses per year Building rental 30,000 7,000 45,000 Selling Total SExed expenses Required: 1. How many pairs of sandals must be sold each year to break even? What does tis represent in total dollar sales? Break-even point in unit sales Break-even point in dollar sales 3. Angie has decided that she must earn at least $4,480 the first year to justify her time and efort.How many pairs of sandals must be sold to reach this target profit? pairs 4. Angie now has two salespersons working in the store-one full time and one part time. It will cost her an additional $12.000 per year to convert the part-time position to a full-tme position. Angie believes that the change would bring in an additional $44,000 in sales each year. Should she comvert the position? Use the incremental approach No 5.Refer to the original data During the first year, the store sold only 74,500 pairs of sandals and reported the following operating results: $238,400 1,520 Sales (74,500 pairs) Fixed expenses Net operaing income 54,880

Answer 1

1. Break-even point in unit sales = Fixed expenses/Contribution margin per unit = $112000/$2.24 = 50000 pairs

Break-even point in dollar sales = 50000 x $3.20 = $160000

3. Unit sales to attain target profit = (Fixed expenses + Target profit)/Contribution margin per unit = ($112000 + $4480)/$2.24 = $116480/$2.24 = 52000 pairs

4. Yes

Since it will increase operating income by $18800

Contribution margin ratio = Contribution margin/Sales = $2.24/$3.20 = 70%

Incremental sales	44000
Incremental contribution margin ($44000 x 70%)	30800
Less: Incremental expenses	12000
Incremental net operating income $	18800

5a. Degree of operating leverage = Contribution margin/Net operating income = $166880/$54880 = 3.04

b. Expected percentage increase in net operating income = 3.04 x 20% = 60.80%