Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store
ID: 2517154 • Letter: A
Question
Angie Silva has recently 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 learned 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:
Sales price per pair of sandals $ 3.20 Variable expenses per pair of sandals 0.96 Contribution margin per pair of sandals $ 2.24 Fixed expenses per year: Building rental $ 30,000 Equipment depreciation 7,000 Selling 45,000 Administrative 30,000 Total fixed expenses $ 112,000Explanation / Answer
1) Break Even point in unit sales = Total Fixed Expenses/Contribution margin per pair
= $112,000/$2.24 per pair = 50,000 pairs
Break Even Point in dollars sales = Break Even units*Selling Price per unit
= 50,000 units*$3.20 per unit = $160,000
3) Target Profit = $4,480
Target Contribution = Target Profit+Total FIxed Expenses
= $4,480+$112,000 = $116,480
Units sales to attain target profit = Target Contribution/Contribution Margin per pair
= $116,480/$2.24 = 52,000 pairs
4) CM Ratio = Contribution Margin per pair/Sale Price per pair
= $2.24/$3.20 = 0.70 or 70%
Incremental Contribution from increase in sales = Additional Sales*CM Ratio
= $44,000*70% = $30,800
Incremental Cost = $12,000
Incremental Profit = Incremental Contribution - Incremental Cost
= $30,800 - $12,000 = $18,800
Yes, the position should be converted to a full time basis because there is an increase in net income by $18,800.
5) a) Degree of Operating leverage = Contribution Margin/Net Operating Income
= $166,880/$54,880 = 3.04
b) If there is a 20% increase in sales, then increase in net operating income will be 60.8% (3.04*20%).
Thus net operating income next year would be $88,247.04 ($54,880*1.608).