Practical Bags operates a chain of retail stores. The store sells simple and practical bags primarily targeted to the youth market. Practical Bags is considering introducing a new style of bag for University students which would have the following revenues and expenses:

Selling price (per bag) $40.00

Variable expenses (per bag)

Direct Materials $15.00

Direct Labour $7.50

Manufacturing Overheads $3.00

Annual fixed expenses:

Rent of shop $75,000

Salaries $100,000

Advertising $80,000

Other operating expenses $20,000

Selling price per bag = $40 Total Variable cost per bag = ($15 + $7.50 + $3.00) = $25.50 Total Fixed expenses = ($75000 + $100000 + $80000 + $20000) = $275000

Break-even in terms of volume = [$275000 / ($40 - $25.50)]

= 18,966 units

Break-even in terms of dollar sales = (18966 units X $40)

= $758,640

a) If Practical Bags sold 20,000 bags during the year, calculate the net profit/loss.

b) What is the margin of safety (round to the nearest Unit) ?

c)How many bags would be required to be sold to achieve a target profit (before tax) of $35,000? (round to nearest Unit)

d)

i. If sales commissions were introduced at a variable cost of $2.00 per bag to motivate sales staff, with a corresponding decrease of $30,000 in salaries, what would be the break-even in units (round to the nearest Unit)?

ii. Would you recommend that Practical Bags implement to above strategy? Provide a reason for your decision.