Pablo Escobar has recently opened a slipper sandal Shop in Brisbane, Australia, a store that specializes in fashionable sleeper sandals. Pablo has just received a degree in business and he is anxious to apply the principles he has learned to his business. As a first step, he has prepared the following income statement based on expected sales level for his store: Total Per unit Sales (26,000 units) $650,000 $25 Less: Variable expenses 442,000 17 Contribution margin 208,000 8 Less: Fixed expenses 234,000 Net operating loss $(26,000)

Required: i. How many pairs of sandals must be sold each year to break even? What does this represent in total sales dollars? (5)

ii. Pablo has decided that he must earn at least $48,000 the first year to justify his time and effort. How many pairs of sandals must be sold to reach this target profit?

(3) iii. What is Pablos Margin of Safety in sales dollar? What does it imply about Pablos performance? (3)

iv. Pablo now has two salespersons working in the storeone full time and one part time. It will cost him an additional $6,000 per year to convert the part-time position to a full-time position. Pablo believes that the change would bring in an additional $50,000 in sales each year. Should he convert the position? Use the incremental approach. (Do not prepare an income statement.) (4)

v. Pablo believes that including quality raw materials would increase sales but it would also increase variable cost per unit by $3. If the sales increases by 20%, should he consider this proposal?