Reference no: EM132929524
Question - Pablo Escobar has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. Pablo 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 $40
Variable expenses per pair of sandals 16
Contribution margin per pair of sandals $24
Fixed expenses per year: Building rental $15,000
Equipment depreciation 7,000
Selling 20,000
Administrative 18,000
Total fixed expenses $60,000
Required -
1. How many pairs of sandals must be sold each year to break even? What does this represent in total sales dollars?
2. Prepare a CVP graph or a profit graph for the store from zero pairs up to 4,000 pairs of sandals sold each year. Indicate the break-even point on your graph.
3. Pablo has decided that she must earn at least $18,000 the first year to justify her time and effort. How many pairs of sandals must be sold to reach this target profit?
4. Pablo now has two salespersons working in the store-one full time and one part time. It will cost her an additional $8,000 per year to convert the part-time position to a full-time position. Pablo believes that the change would bring in an additional $25,000 in sales each year. Should she convert the position? Use the incremental approach. (Do not prepare an income statement.)
5. Refer to the original data. During the first year, the store sold only 3,000 pairs of sandals and reported the following operating results:
Sales (3,000 pairs) $120,000
Variable expenses 48,000
Contribution margin 72,000
Fixed expenses 60,000
Net operating income $12,000
a) What is the store's degree of operating leverage?
b) Pablo is confident that with a more intense sales effort and with a more creative advertising program she can increase sales by 50% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage to compute your answer.