Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fashionable stockings. Ms. Hall has just completed a course in managerial accounting, and she believes that she can apply certain aspects of the course to her business. She is particularly interested in adopting the cost-volume-profit (CVP) approach to decision making. Thus she has prepared the following analysis:
- Sales Price per pair of stockings= $49.00
- Variable expense per pair of stockings= 19.60
Contribution margin per pair of stockings= $29.40
- Fixed expenses per year:
- Building rental= $12,348
- Equipment depreciation= 3,087
- Selling= 30,870
- Administrative= 15,435
- Total fixed expense= $61,740
1. How many pairs of stockings must be sold to break even? What does this represent in total dollar sales?
- Break-even point in unit sales=_____ pairs
- Break-even point in dollar sales= $______
3. How many pairs of stockings must be sold to earn a $14,000 target profit for the first year?
Unit sales to attain target profit=____ pairs
4. Ms. Hall has one full-time and one part-time salesperson working in the store. It will cost her an additional $10,600 per year to convert the part-time position to a full-time position. Ms. hall believes that the change would bring in an additional $24,000 in sales each year. Should she convert the position? Use the incremental approach.
5. Refer to the original data. Actual operating results for the first year are as follows:
- Sales= $147,000
- Variable Expenses= 58,800
- Contribution Margin= 88,200
- Fixed expenses= 61,740
- Net operating income=$26,460
a) What is the store's degree of operating leverage?
b)Ms hall is confident that with some effort she can increase sales by 29% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage concept to compute your answer.