CVP Analysis; Strategy Bubba’s Western Wear is a western hat retailer in Lubbock
ID: 2473968 • Letter: C
Question
CVP Analysis; Strategy 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, such as restocking inventory and hiring and training new salespeople, more difficult. Sales price $ 80.00 Per unit variable expenses Purchase cost 41.50 Sales commissions 10.50 Total per unit variable costs $ 52.00 Total annual fixed expenses Advertising $ 98,500 Rent 146,500 Salaries 255,000 Total fixed expenses $500,000
This is what I got as answer and Professor said it is wrong. Where it says wrong formula is what he says is wrong. Please help. Thanks. Question to be answered is below.
32,000 x $45 - $675,000
$1,440,000 - $675,000
= $765,000
Margin of safety in units
$765,000/$45 = 17, 000
Wrong formula: should be Budgeted Sales Vol - BE sales volume both in units
32,000 - 17,857 (will change next ratio as well)
Margin of safety ratio= margin of safety/ planned safety
17,000/32,000 =0.53
Sales volume would go down by 53% before losses started.
Question: If Bubba’s sells 32,000 hats, what is its margin of safety (MOS) and margin of safety ratio (MOS%)? Of what interpretive value are these two measures?
Explanation / Answer
Contribution =80-52 28 Fixed Cost 500000 Break even units =500000/28 17857 Margin of Saftey =32000-17857 14143 Margin of safety ratio (Sales-BES)/Sales =(32000-17857)/32000 44.20%