The Tops national chain of shirt stores carry many styles of shirts that are all sold at the same price. To encourage sales personnel to step up their sales efforts, the company pays a generous sales commission on each shirt sold. Sales personnel also receive a small basic salary.

The following table contains cost and revenue data for the Bradbury store. These data are typical of the company’s many outlets:

Per Shirt

Selling price. . . . . . . . . . . . . . . . . . . . . . . . . . . . $40.00

Variable expenses:

Invoice cost. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18.00

Sales commission. . . . . . . . . . . . . . . . . . . . . . 7.00

Total variable expenses. . . . . . . . . . . . . . . . . $25.00

Annual

Fixed expenses:

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,000

Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000

Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000

Total fixed expenses. . . . . . . . . . . . . . . . . . . . . $300,000

Tops is a fairly new company. The company has asked you, as a member of its planning group, to assist in some basic analysis of its stores and company policies.

Required:

1. Calculate the annual break-even point in dollar sales and in unit sales for the Bradbury store.

2. Prepare a CVP graph showing cost and revenue data for the Bradbury store from 0 shirts up to 30,000 shirts sold each year. Clearly indicate the break-even point on the graph.

3. If 19,000 shirts are sold in a year, what will be the Bradbury store’s operating income or loss?

4. The company is considering paying the Bradbury store manager an incentive commission of $3 per shirt (in addition to the salesperson’s commissions). If this change is made, what will be the new break-even point in dollar sales and in unit sales?

5. Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager a $3 commission on each shirt sold in excess of the break-even point. If this change is made, what will be the store’s operating income or loss if 23,500 shirts are sold in a year?

6. Refer to the original data. The company is considering eliminating sales commissions entirely in its stores and increasing fixed salaries by $107,000 annually.

a. If this change is made, what will be the new break-even point in dollar sales and in unit sales in the Bradbury store?

b . Would you recommend that the change be made? Explain.