Problem 5-28

I'd like help with the following problem, but please explain how you arrived at your answers. Thank you!

Problem 5-28 Graphing; Incremental Analysis; Operating Leverage [LO2, LO4, LO5, LO6, LO8]

Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fashionable stockings. Ms. 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 cost-volume-profit (CVP) approach to decision making. Thus, she has prepared the following analysis: Sales price per pair of stockings $ 49.00 Variable expense per pair of stockings 19.60 Contribution margin per pair of stockings $ 29.40

Fixed expense per year: Building rental $ 12,936 Equipment depreciation 3,234 Selling 32,340 Administrative 16,170 Total fixed expense $ 64,680

Required: 1. How many pairs of stockings must be sold to break even? What does this represent in total dollar sales? (Round "per unit" values to 2 decimal places and final answers to the nearest whole number. Do not round other intermediate calculations. Omit the "$" sign in your response.)

Break-even point in unit sales _____________pairs Break-even point in dollar sales $ ______________

3. How many pairs of stockings must be sold to earn a $10,000 target profit for the first year? (Round the cost per unit to 2 decimal places and final answer to the nearest whole number. Do not round other intermediate calculations.)

Unit sales to attain target profit ____________pairs

4. Ms. Hall now has one full-time and one part-time salesperson working in the store. It will cost her an additional $10,600 per year to convert the part-time position to a full-time position. Ms. Hall believes that the change would bring in an additional $25,000 in sales each year. Should she convert the position? Use the incremental approach. ___No ___Yes

5. Refer to the original data. Actual operating results for the first year are as follows: Sales $ 147,000 Variable expenses 58,800 Contribution margin 88,200 Fixed expenses 64,680 Net operating income $ 23,520

a. What is the stores degree of operating leverage? (Round your answer to 2 decimal places.)

Degree of operating leverage ______________

b. Ms. Hall is confident that with some effort she can increase sales by 27% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage concept to compute your answer. (Round your intermediate calculations and final answer to 2 decimal places. Omit the "%" sign in your response.)

Expected percentage increase in net operating income _____________%