Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fashionable stockings. Ms. Hall has just completed a course in managerial accounting, and she believes that she can apply certain aspects of the course to her business. She is particularly interested in adopting the cost-volume-profit (CVP) approach to decision making. Thus, she has prepared the following analysis:
Sales price per pair of stockings $ 45.00
Variable expense per pair of stockings $18.00
Contribution margin per pair of stockings $ 27.00
Fixed expense per year:
Building rental $11,880
Equipment depreciation $2,970
Total fixed expense $59,400
1. How many pairs of stockings must be sold to break even? What does this represent in total dollar sales?
2. How many pairs of stockings must be sold to earn an $18,000 target profit for the first year?
3. Ms. Hall now has one full-time and one part-time salesperson working in the store. It will cost her an additional $8,800 per year to convert the part-time position to a full-time position. Ms. Hall believes that the change would bring in an additional $21,000 in sales each year. Should she convert the position? Use the incremental approach.
4. Refer to the original data. Actual operating results for the first year are as follows:
Variable expenses $54,000
Contribution margin $81,000
Fixed expenses $59,400
Net operating income $21,600
a. What is the store’s degree of operating leverage?
b. Ms. Hall is confident that with some effort she can increase sales by 26% next year. What would be the expected percentage increase in net operating income?