A B E 1 The Lids national chain of hat stores carry many styles of hats that are all sold at the same 2 price. To encourage sales personnel to step up their sales efforts, the company pays a 3 generous sales commission on each hat sold. Sales personnel also receive a small basic salary. 4 5 The following table contains cost and revenue data for the Serenade store. These data are 6 typical of the company's many outlets: A B $ GA 33.30 $ 6 typical of the company's many outlets: 7 Selling price 8 Variable expenses 9 Invoice cost 10 Sales Commission 11 12 Contribution Margin 13 Fixed Expenses (annually) 14 Advertising 15 Rent 16 Salaries 9.00 7.00 16.00 17.30 AIA S S S 80.000 150,000 70,000 300.000 17 CA 18 A B C 19 Part 2 20 hats sold 19,000 21 22 Part 3 $ 2.00 23 24 Manager commission 25 Part 4 26 Increased fixed salaries 27 Reduction in Commissions $ $ 107.000 7.00 28 29 30 31 32 33 34 35 Part 5 36 Targeted After-tax profit 37 Income tax rate $ 250,000 25% H 1 Required: 2 Lids is a fairly new company. The company has asked you, as a member of its planning group, to assist in some basic analysis of its stores and company policies. 3 4 5 1. Calculate the annual break-even point in dollar sales and in unit sales for the Serenade store. 6 7 8 Breakeven Point in Sales 9 10 Breakeven Point in Unit Sales 11 12 2. If 19.000 hats are sold in a year, what will be the Serenade store's operating income or loss? 13 14 15 16 Operating income (loss) H 17 18 3. The company is considering paying the Serenade store manager an incentive commission of $2 per hat (in addition to the salesperson's commissions). If this change is made, what will be the new break-even point in dollar sales and in unit sales? 19 20 21 22 Breakeven Point in Sales 23 24 Breakeven Point in Unit Sales 25 27 26 4. Refer to the original data. The company is considering eliminating sales commissions entirely in its stores and increasing fixed salaries by $107.000 annually. If this change is made, what will be the new break-even point in dollar sales and in unit sales in the Serenade store? 30 Breakeven Point in Sales 28 29 31 32 33 Breakeven Point in Unit Sales H K G 34 35 5. Refer to the original data. Determine the total sales dollars the company would have to achieve 36 to earn an after-tax profit of $250,000 given that their income tax rate is 25%? 37 Also, at this level of sales, what would be the company's Margin of Safety and Margin of Safety %? 38 39 Total Sales for target after-tax profit of $250,000 40 41 Margin of Safety 42 43 Margin of Safety 44
