Teri Hall recently opened Sheer Elegance Inc., a store specializing in fashionable stockings. 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 CVP approach to decision making. Thus, she has prepared the following analysis:

Required:
1. How many pairs of stockings must the store sell to break even? What does this represent in total dollar sales?

2. Prepare a CVP graph for the store from O pairs up to 60,000 pairs of stockings sold each year. Indicate the break-even point on the graph.

3. How many pairs of stockings must the store sell to earn a $15,000 target profit for the first year? Redo your analysis assuming a tax rate of 25% and an after-tax target profit of $15,000 for the first year.

4. Hall now has one full-time and one part-time salesperson working in the store. It will cost her an additional $20,000 per year to convert the part-time position to a full-time position. Hall believes that the change would bring in an additional $40,000 in sales each year. Should she convert the position? Use the incremental approach. (Do not prepare an income statement.) 

5. Refer to the original data. Actual operating result~ for the first year are as follows:

a. What is the store's degree of operating leverage?

b. Hall is confident that with some effort she can increase sales by 20% next year. What would be the expected percentage increase in operating income? Use the degree of operating leverage concept to compute your answer.

Transcribed Image Text:

$600,000 Sales... Variable expenses. Contribution margin. . Fixed expenses . Operating income. 240,000 360,000 240,000 $120,000