The Vincci Shoe Company operates a chain of shoe store that sell 10 different styles of lady shoe with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. Vincci is considering opening another store that is expected to have the revenue and cost relationship show here:

Unit Variable data (per pair of shoes)

Selling price $30.00

Cost of shoes $19.50

Sales commission $1.50

Variable cost per unit $21.00

Annual Fixed Costs

Rent $60,000

Salaries $200,000

Advertising $80,000

Other fixed costs $20,000

Total fixed costs $360,000

Required:

1. What is the annual breakeven point in unit sold and revenues? (3 marks)

2. If $35,000 unit are sold, what will be the store’s operating income/loss. (5 marks)

3. If sales commissions are discontinued and fixed salaries are raised by a total of $81,000, what would be the annual breakeven point in units sold and revenues? (6 marks)

Refer to requirement 3 above. In this problem, assume the role of the owner of Vincci Shoe Company.

Required:

4. Calculate the number of units sold at which the owner of Vincci would be indifferent between the original salary-plus-commissions plan for sale people and the higher fixed-salaries-only plan. (9 marks)

5. Suppose the target operating income is $168,000. How many units must be sold to reach the target operating income under the original salary-plus-commissions plan and the higher-fixed-salaries-only plan? (6 marks)

6. You open the new store on January 1, 2009, with the original salary-plus-commission compensation plan in place. Because you expect the cost of the shoes to rise due to inflation, you place a firm bulk order for 50,000 shoes and lock in the $19.50 prices per unit. But toward the end of the year, only 48,000 shoes are sold, and you authorize a markdown of the remaining inventory to $18 per unit. Finally, all units are sold. Salespeople as usual get paid a commission of 5% of revenues. What is the annual operating income for the store? (6 marks)

Unit Variable data (per pair of shoes)

Selling price $30.00

Cost of shoes $19.50

Sales commission $1.50

Variable cost per unit $21.00

Annual Fixed Costs

Rent $60,000

Salaries $200,000

Advertising $80,000

Other fixed costs $20,000

Total fixed costs $360,000

Required:

1. What is the annual breakeven point in unit sold and revenues? (3 marks)

2. If $35,000 unit are sold, what will be the store’s operating income/loss. (5 marks)

3. If sales commissions are discontinued and fixed salaries are raised by a total of $81,000, what would be the annual breakeven point in units sold and revenues? (6 marks)

Refer to requirement 3 above. In this problem, assume the role of the owner of Vincci Shoe Company.

Required:

4. Calculate the number of units sold at which the owner of Vincci would be indifferent between the original salary-plus-commissions plan for sale people and the higher fixed-salaries-only plan. (9 marks)

5. Suppose the target operating income is $168,000. How many units must be sold to reach the target operating income under the original salary-plus-commissions plan and the higher-fixed-salaries-only plan? (6 marks)

6. You open the new store on January 1, 2009, with the original salary-plus-commission compensation plan in place. Because you expect the cost of the shoes to rise due to inflation, you place a firm bulk order for 50,000 shoes and lock in the $19.50 prices per unit. But toward the end of the year, only 48,000 shoes are sold, and you authorize a markdown of the remaining inventory to $18 per unit. Finally, all units are sold. Salespeople as usual get paid a commission of 5% of revenues. What is the annual operating income for the store? (6 marks)

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