The Comfort Sole Shoe Company operates a chain of shoe stores. The stores sell 10 different styles of inexpensive men's shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. Comfort Sole is trying to determine the desirability of opening another store which is expected to have the following revenue and cost relationships. E: (Click the icon to view the revenue and cost information.) Note that if sales commissions were discontinued for individual salespeople, there would be an $86,000 increase in fixed salaries. Required Requirement 1. Calculate the number of units sold where the operating income under (a) a fixed-salary plan and (b) a lower fixed-salary-and-commission plan (for salespeople only) would be equal. Above that number of units sold, one plan would be more profitable than the other, below that number of units sold, the reverse would occur. (Round your answer up to the nearest whole unit.) The number of units sold where the operating income under both plans would be equal is Requirement 2. As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 45,103 units? What do you think of the motivation aspects of your chosen compensation plan? When sales volume is above pairs, the higher fixed-salaries plan results in costs and operating incomes than the fixed-salary-plus-commission plan. So, for an expected volume of 45,103 pairs, the owner would be inclined to choose the plan. But it is likely that sales volume itself is determined by the nature of the compensation plan. The V plan provides a greater motivation to the salespeople, and it may well be that for the same amount of money paid to salespeople, the fixed-salary-plus-commission plan generates a volume of sales than the fixed-salary plan. Requirement 3. Suppose the target operating income is $727,000. How many units must be sold to reach the target under (a) the fixed-salary plan and (b) the lower fixed-salary-and-commission plan? (Round your answers up to the nearest whole unit.) The number of units under the fixed-salary plan would be The number of units under the fixed-salary-and-commission plan would be Requirement 4. You open the new store on January 1, 2019, with the original fixed-salary-plus-commission compensation plan in place. Because you expect the cost of the shoes to rise due to inflation, you place a firm bulk order for 51,000 shoes and lock in the $20.50 per unit price. But, toward the end of the year, only 49,000 pairs of shoes are sold and you authorize a markdown of the remaining inventory to $17.00 per unit. Finally all units are sold. Salespeople, as usual, get paid a commission of 5% of revenues. What is the annual operating income for the store? Complete the income statement to compute the annual operating income. (Use parentheses or a minus sign for an operating loss.) Comfort Sole Shoe Company Operating Income Statement For the year ended December 31, 2019 Revenue Cost of shoes Commissions Contribution margin Fixed costs Operating income * Revenue and Cost information - X $ 39.00 20.50 1.95 EA 22.45 Selling price Unit variable cost per pair Cost of shoes Sales commissions Total variable costs Annual fixed costs: Rent Salaries Advertising Other fixed costs Total fixed costs $ 62,000 200,000 88,000 21,000 371,000 $
