Management Accounting

| November 18, 2015

Cost Volume Profit Analysis

The DC Shoe Company operates a chain of shoe stores that sell 10 different styles of inexpensive men’s shoes 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. DC is considering opening another store that is expected to have the revenue and cost relationships shown here:

 

Unit Variable Data (per pair of shoes) Annual Fixed Cost
Selling Price $   35.00 Rent $             77,000
Salaries $           262,000
Cost of Shoes $     23.20 Advertising $             86,000
Sales Commission     $     1.80 Other fixed costs $             36,000
Variable Cost Per Unit $   25.00 Total fixed costs $           461,000

 

 

Required: (Consider each question independently)

 

  1. Define cost-volume-profit (CVP) analysis and outline four assumptions underlying What is the annual breakeven point in (a) units sold and (b) revenues?

 

  1. If 60,000 units are sold, what will be the store’s operating income (loss)?

 

  1. If sales commissions are discontinued and fixed salaries are raised by a total of $75,000, what would be the annual breakeven point in (a) units sold and (b) revenues?

 

  1. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.35 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues?

 

  1. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.35 per unit in excess of the breakeven point, what would be the store’s operating income if 60,000 units were sold?

 

 

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