The WalkRite Shoe Company operates a chain of shoe stores that sell ten different styles of inexpensive 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. WalkRite is considering opening another store that is expected to have the revenue and cost relationships shown here:

UNIT VARIABLE COSTS (per pair of shoes)

Selling price $30.00

Cost of shoes 19.50

Sales commission 1.50

Variable Cost Per Unit $21.00

ANNUAL FIXED COSTS Rent $ 60,000

Salaries 200,000

Advertising 80,000

Other fixed costs 20,000

Total Fixed Costs $360,000 (CONSIDER EACH QUESTION INDEPENDENTLY)

6. Refer to the original data. Calculate the number of units sold which the owner of WalkRite would be indifferent between the original salary plus commissions plan for salespeople and the higher fixed salaries only plan.

7. As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 55,000 units? What do you think of the motivational aspect of your chosen compensation plan?

8. Suppose the target operating income is $168,000. How many units must be sold to reach the target operating income under (a) the original salary plus commissions plan and (b) the higher fixed salaries only plan?

9. You open the new store on January 1, with the 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 50,000 shoes and lock in the $19.50 price per unit. But, toward the end of the year, only 48,000 shoes are sold, and you authorize a markdown of the remaining inventory to $18.00 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?