Angie Silva has recently opened The Sandal Shop in Manila, a store that specializes in fashionable sandals. In time, she hopes to open a chain of sandal shops. As a first step, she has gathered the following data for her new store:
Sales price per pair of sandals Variable expenses per pair of sandals Contribution margin per pair of sandals P400
160
P240
Fixed expenses per year: Building rental
P150,000
Equipment depreciation 8,000
Selling 50,000
Administrative 40,000
Total fixed expenses P248,000
Required:
1. Suppose the store can sell 1,500 pairs of fashionable sandals this year, create a contribution margin income statement using the data provided.
2. What is the break-even point in number of units and sales amount? Compare the results of the break-even computation and the answer for No. 1 requirement. After computing relevant information, discuss your analysis and observation.
3. Angie is planning to consider a target profit of P90,000 net of 20% income tax. What is the break-even point in number of units and sales amount to achieve the target profit? Provide proof by preparing a contribution margin format income statement with P90,000 as the net operating income after tax.
4. With the contribution margin format income statement from the information in No. 1, compute the margin of safety in percentage and the degree of operating leverage.
5. Assuming Angie is optimistic that the store can sell up to 2,000 pairs of fashionable sandals during the year. The difference of 500 pairs of fashionable sandals from the original estimated sale of 1,500 fashionable sandals is equivalent to an increase of 33.33%. Using the degree of operating leverage computed in No. 4 requirement, how much is the expected percentage increase in net operating income?