Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store
ID: 2542477 • 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 Variable expense per pair of sandals $ 1.80 0.72 Contribution margin per pair of sandals 108 Fixed expense per year: Building rental Equipment depreciation Selling Administrative $14,000 1,000 39,800 10,000 Total fixed expense $64,800Explanation / Answer
1.
Contribution margin per pair = 1.08
Contribution margin percenatge = Contribution margin / selling price
= 60%
2.
Unit sales to attain target profit = (fixed cost + target profit) / Contribution margin per unit
= (64,800 + 2,160) / 1.08
= 62,000
3(a)
Degree of operating leverage = Contribution margin / Operating income
= 72,900 / 8,100
= 9 times
A degree of operating leverage of 9 means that 1% increase in sales will result in a 9% (9*1%) increase in operating income
3(b)
Expected percentage increase in net operating income = 9 * 10% = 90%
Break-even point in unit sales Fixed cost / Contribution margin per unit 60,000 (64,800/1.08) Break-even point in dollar sales Fixed cost / Contribution margin percenatge 108,000 (64,800/60%)