The Memory Fit 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. Memory Fit is trying to determine the desirability of opening another store which is expected to have the following revenue and cost relationships.

Selling price

$35.00

Unit variable cost per pair:

Cost of shoes

20.50

Sales commissions

1.75

Total variable costs

$22.25

Annual fixed costs:

Rent

$61,000

Salaries

208,000

Advertising

87,000

Other fixed costs

27,000

Total fixed costs

$383,000

Note that if sales commissions were discontinued for individual salespeople, there would be an $83,000 increase in fixed salaries.

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.
2.	As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 48,429 units? What do you think of the motivation aspects of your chosen compensation plan?
3.	Suppose the target operating income is $404,000. 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?
4.	You open the new store on January 1, 2019, with the original 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 46,000 shoes and lock in the $20.50 per unit price. But, toward the end of the year, only 44,000 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?