The WalkRite Shoe Company operates a chain of shoe stores...

The WalkRite 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. WalkRite is considering opening another store that is expected to have the revenue and cost relationships shown here: Consider each question independently 1. What is the annual breakeven point in (a) units sold and (b) revenues? 2. If 35,000 units are sold, what will be the store's operating income (Iloss)? 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 (a) units sold and (b) revenues? 4. Refer to the original data. . If in addition to his fixed salary, the store manager is paid a commission of S0.30 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues? 5. Refer to the original data. If , in addition to his fixed salary, the store manager is paid a commission of $\$ 0.30$ per unit in excess of the breakeven point, what would be the store's operating income if 50,000 units were sold?

The WalkRite 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. WalkRite is considering opening another store that is expected to have the revenue and cost relationships shown here:
Consider each question independently
1. What is the annual breakeven point in (a) units sold and (b) revenues?
2. If 35,000 units are sold, what will be the store's operating income (Iloss)?
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 (a) units sold and (b) revenues?
4. Refer to the original data. . If in addition to his fixed salary, the store manager is paid a commission of S0.30 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues?
5. Refer to the original data. If , in addition to his fixed salary, the store manager is paid a commission of $\$ 0.30$ per unit in excess of the breakeven point, what would be the store's operating income if 50,000 units were sold?

Key Concepts

Break-even Analysis

Break-even analysis is the process of determining the number of units or the amount of revenue needed to cover all fixed and variable costs. This concept helps in identifying the point at which a business neither makes a profit nor incurs a loss, serving as a critical decision-making tool in planning and evaluating the financial viability of new ventures or changes in cost structure.

Contribution Margin

Contribution margin refers to the amount remaining from sales revenue after variable costs have been deducted. This margin contributes to covering fixed costs and, once those are covered, to generating profit. It is a foundational concept in cost-volume-profit analysis, helping managers assess the impact of sales volume changes on overall profitability.

Fixed Costs

Fixed costs are expenses that do not change with the level of production or sales volume. These costs, such as salaries of store managers or rent, must be paid regardless of the number of units sold and play a key role in determining the break-even point. Understanding fixed costs is essential for accurate profit planning and cost management.

Variable Costs

Variable costs fluctuate directly with the volume of units produced or sold. Examples include sales commissions and cost per unit items. Recognizing how variable costs behave is crucial for constructing contribution margins and conducting break-even analysis, thereby allowing businesses to predict how changes in sales volume impact profitability.

Operating Income

Operating income represents the profit realized from a company’s core business operations after subtracting operating expenses, including both fixed and variable costs. It is a key indicator of a business's operational efficiency and is used to assess the financial performance of a business independently of non-operating factors.

Commission Structures

Commission structures are forms of variable compensation that tie employee earnings to sales performance. They can significantly influence the cost behavior of an organization by affecting both the variable cost component and the breakeven point, thereby impacting overall profitability and financial planning.

Cost-Volume-Profit Analysis

Cost-volume-profit (CVP) analysis is a method used to understand how changes in cost and volume affect a company's operating income and net income. By examining the interplay between fixed costs, variable costs, sales volume, and margin contributions, CVP analysis aids in making decisions such as pricing, product mix, and cost control strategies.

Transcript

00:01 So the work rights shoe company operates a chain of shoe stores that sells 10 different styles of inexpensive men's shoes with identical units costs and selling prices.

00:14 Now, a unit is defined as a pair of shoes and each store as a store manager who is paid a fixed salary.

00:23 Individual salespeople receive a fixed salary and a sales commission.

00:28 Workrise is considering opening another store that is expected to have the revenue and cost relationship showed in the table below.

00:35 We are giving the unit variable data, paper or shoes and the annual fixed cost.

00:41 So we'll answer the following questions and i'll be answering them one by one.

00:45 Now the first question is, what is the animal break -even points in units sold and also in revenues? so we're going to start with annual break -even points and we're going to start with units and in revenues.

00:57 So we have annual break -even points.

01:08 So first of all, the selling price per unit, sp per unit, is $30 from the table.

01:21 Then we subtract or less the variable cost per unit.

01:27 And the variable cost per unit is $21.

01:30 Dollars so let's start and then what we'll get with the difference and that would be the contribution margin by units and that is nine dollars right because 30 minus 21 is 9 so therefore the contribution margin ratio the contribution margin ratio is equal to the contribution margin divided by selling price so therefore we're going to have nine dollars contribution margin is 9 dollars certain price is $30.

02:14 So 9 divided by 30 will be the contribution margin ratio.

02:18 And that would be 30%.

02:22 Now, the first question, which is the break -even, the annual break -even point in units.

02:28 So therefore, the break -even point in units, which is the first part of the question, would be the total fixed cost divided by the contribution margin per unit...

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