Angie Silva has recently opened The Sandal Shop, a store that specializes in fashionable sandals in Brisbane, Australia. 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--- $40
- Variable expenses per pair of sandals--- $16
- Contribution margin per pair of sandals-- $24
- Fixed Expenses per year:
- Building Rent--- 15,000
- Equipment Depreciation--- 7,000
- Selling--- 20,000
- Administration--- 18,000
- Total Fixed Expenses--- 60,000
Required:
1. How many pairs of sandals must of sold each year to break even? What does this represent in total sales dollars?
2. Angie has decided that she must earn at least $18,000 the first year to justify her time and effort. How many pairs of sandals must be sold to reach this target profit?
3. Angie now has two salespersons working in the store-- one full time and one part time. It will cost her an additional $8,000 per year to convert the part-time position to a full-time position. Angie believes that the change would bring an additional $25,000 in sales each year. Should she convert the position? Use the incremental approach. (Do not prepare an income statement)
4. Refer to the original data. During the first year, the store only sold 3,000 pairs of sandals and reported the following operating results:
- Sales (3,000 pairs)--- $120,000
- Variable exprenses--- $48,000
- Contribution margin--- $72,000
- Fixed expenses--- $60,000
- Net Operating Income--- $12,000
a. What isthe store's degree of operating leverage?
b. Andie is confident that with a more intense sales effort and with creative advertising program she can increase sales by 50% next year. What would be the expected percentage increase in net operating leverage to compute your answer.