Assignment:
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 |
$ |
1.60 |
| Variable expense per pair of sandals |
|
0.80 |
| Contribution margin per pair of sandals |
$ |
0.80 |
| Fixed expense per year: |
|
|
| Building rental |
$ |
7,000 |
| Equipment depreciation |
|
5,000 |
| Selling |
|
21,400 |
| Administrative |
|
13,000 |
| Total fixed expense |
$ |
46,400 |
Q1. How many pairs of sandals must be sold each year to break even? What does this represent in total dollar sales?
Q2. Prepare a CVP graph and a profit graph for the store from zero pairs up to 70,000 pairs of sandals sold each year. Indicate the break-even point on the graph. (Use the line tool to draw a single line (Total Sales, Fixed Expense, Total Expense, Profit). This line should only contain the two endpoints. Use the point tool (Break Even Point) to plot the Break Even Point. For your graph to grade correctly, you must enter the exact x and y coordinates for each endpoint. Once all points have been plotted, click on the line (not individual points) and a tool icon will pop up. You can use this to enter exact co-ordinates for your points as needed. To remove a line/point from the graph, click on the line/point and select delete option.)
Q3. How many pairs of sandals must be sold to earn a $1,600 target profit for the first year?
Q4. Angie now has one full-time and one part-time salesperson working in the store. It will cost her an additional $7,000 per year to convert the part-time position to a full-time position. Angie believes that the change would bring in an additional $28,000 in sales each year. Should she convert the position? Use the incremental approach.
Yes
No
Q5. Refer to the original data. Actual operating results for the first year are as follows:
| Sales (66,500 pairs) |
$ |
106,400 |
| Variable expenses |
|
53,200 |
| Contribution margin |
|
53,200 |
| Fixed expenses |
|
46,400 |
| Net operating income |
$ |
6,800 |
a. What is the store’s degree of operating leverage? (Round your answer to 2 decimal places.)
b. Angie is confident that with a more intense sales effort and with a more creative advertising program she can increase sales by 10% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage concept to compute your answer. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).
Provide complete and step by step solution for the question and show calculations and use formulas.