The

Sporty

Shoe Company operates a chain of shoe stores that 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.

Sporty

is considering opening another store that is expected to have the revenue and cost relationships shown here:

A

B

C

D

1

Unit Variable Data (per pair of shoes)

Annual Fixed Costs

2

Selling price

$40.00

Rent

$31,000

3

Cost of shoes

$20.00

Salaries

121,000

4

Sales commission

2.00

Advertising

25,000

5

Variable cost per unit

$22.00

Other fixed costs

12,000

6

Total fixed costs

$189,000

Shoe Company is considering an alternative compensation plan; one in which the sales commissions are discontinued and fixed salaries are raised by a total of

$11,000,

Assume the role of the owner of

Sporty

Shoe Company.

1.	As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 12,000? What do you think of the motivational aspect of your chosen compensation plan?
2.	Suppose the target operating income is $58,000. How many units must be sold to reach the target operating income under (a) the originalsalary-plus-commissions plan and (b) the higher- fixed-salaries-only plan? Which method would you prefer? Explain briefly.
3.	You open the new store on January 1, 2017, with the originalsalary-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 9,000 shoes and lock in the $20.00 price per unit. But toward the end of the year, only 4,500 shoes are sold, and you authorize a markdown of the remaining inventory to $26 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?