CVP

Mandel Adams BUS 630: Managerial Accounting CVP Instructor: Oscar Lewis June 18, 2012,

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Calculate the annual break-even point in dollar sales and in unit sales for Shop 48. Prepare a CVP graph showing cost and revenue data for Shop 48 from zero shoes up to 17,000 pairs of shoes sold each year. Clearly indicate the break-even point on the graph. If 12,000 pairs of shoes are sold in a year, what would be Shop 48's net operating income or loss? The company is considering paying the store manager of Shop 48 an incentive commission of Shop 48 an incentive commission of 75 cents per pair of shoes (in addition to the salesperson's commission). If this change is made, what will be the new break-even point in dollar sales and in unit sales? Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager 50 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be the shop's net operating income or loss if 15,000 pairs of shoes are sold? Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $31,500 annually. If this change is made, what will be the new break-even point in dollar sales and in unit sales for Shop 48? Would you recommend that the change be made? Explain.

On page 124 of our text a CVP formula is given: Profit = Unit CM x Q Fixed expenses P = ($30 - $18) x Q - $150,000 (12) x Q - $150,000 $12 = $150,000 / 12 = 12,500 pairs of shoes (Multiply Volume of shoes) 12,500 x $30 per pair (cost per pair of shoes) = $375,000 sales

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If 12,000 pairs of shoes are sold in a year, what would be Shop 48's net operating income or loss? The break even sales are $12,500 pairs if 12,000 shoes are sold in a year then the sales would be short 500 pairs of shoes. You would multiply the 500 pairs and the $12 CM per pair to get a loss of $6,000

The company is considering paying the store manager of Shop 48 an incentive commission of Shop 48 an incentive commission of 75 cents per pair of shoes (in addition to the salesperson's commission). If this change is made, what will be the new break-even point in dollar sales and in unit sales?

The variable expense would be adjusted from $18.00 to $18.75. The new CM would be $11.25 Profit = Unit CM x Q Fixed expenses = ($30.00 - $18.75) x Q - $150,000 ($11.25) x Q - $150,000 $150,000/ $11.25 = 13,333 pairs (units) Multiply this times the selling price 13,333 x $30.00 = $400,000 total sales (dollars)

Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager 50 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be the shop's net operating income or loss if 15,000 pairs of shoes are sold?

You can subtract actual sales from break even sales like so: 15,000-12,500 = 2,500 pairs, then Multiply the excess pairs by the unit cost to get a profit amounts: 2,500 x $11.50 = $28,750

CVP

The shop would have a net income of $28,750

Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $31,500 annually. If this change is made, what will be the new breakeven point in dollar sales and in unit sales for Shop 48? Would you recommend that the change be made? Explain. If you take out the sales commission the new variable expense amount will be $13.50 per pair of shoes. You will add the increase to the total fixed expenses also. Profit = Unit CM x Q Fixed expenses ($30.00 - $13.50) x Q - $181,500 = (16.50) x Q - $181,500 = $181,500 / $16.50 = 11,000 pairs Then multiply 11,000 x $30.00 = $330,000 The break even point would be lowered from 12,500 to 11,000. That good but with the employees now on a fixed budget and not on a commission they might not sale as many units as before, because their salary isnt based on how much they sell anymore. The company sales could drop and they will still have to pay the employees their fixed amount.