P3–9 Basic CVP analysis; graphing Time allowed: 60 minutes The Fashion Shoe Company operates a chain of women’s shoe shops around the country. The shops carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a substantial commission on each pair of shoes sold (in addition to a small basic salary) in order to encourage them to be aggressive in their sales efforts.

The following cost and revenue data relate to Shop 48 and are typical of one of the company’s many outlets:

Required 1 Calculate the annual break-even point in pound sales and in unit sales for Shop 48.
2 Prepare a CVP graph showing cost and revenue data for Shop 48 from a zero level of activity up to 20,000 pairs of shoes sold each year. Clearly indicate the break-even point on the graph.
3 If 12,000 pairs of shoes are sold in a year, what would be Shop 48’s profit or loss?
4 The company is considering paying the store manager of Shop 48 an incentive commission of 75 pence per pair of shoes (in addition to the salesperson’s commission). If this change is made, what will be the new break-even point in pound sales and in unit sales?
5 Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager 50 pence commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be the shop’s profit or loss if 15,000 pairs of shoes are sold?
6 Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by £31,500 annually. If this change is made, what will be the new break-even point in pound sales and in unit sales for Shop 48? Would you recommend that the change be made? Explain.

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Sales price Variable expenses: Invoice cost Sales commission Total variable expenses Per pair of shoes 30.00 13.50 4.50 18.00 Annual Fixed expenses: Advertising 30,000 Rent 20,000 Salaries 100,000 Total fixed expenses 150,000