498 Words2 Pages

Per Noreen, Brewer and Garrison, CVP Analysis, or Cost-Volume-Profit Analysis helps managers understand how profits are affected by selling prices, sales volume, unit variable costs, total fixed costs and the mix of products sold. (p. 119). This exercise uses The Fashion Shoe Company, Shop 48, as our fictitious company with specific cost and revenue data. The annual break-even point in dollar and unit sales for Shop 48, are 12, 500 in unit sales and $375,000 in dollar sales. The Unit Contribution Margin had to be figured out first:
Unit CM = Selling Price per Unit – Variable Expenses per Unit
Unit CM = 30.00 – 18.00 = 12.00
Then,
Unit Sales to Attain the Target Profit = Target Profit + Fixed Expenses/Unit CM
Target Profit = $0 because of break-even analysis
Fixed Expenses = 150, 000
Unit CM = 12.00
Unit Sales to Attain the Target Profit = 0 + 150,000/12.00 = 12, 500 unit sales
Then,
Sales = Selling Price per Unit x Quantity Sold = P x Q = 30.00 x 12, 500 = $375,000 in dollar
sales. If 12,000 pairs of shoes are sold within the year, Shop 48’s net loss would be $6000 due to the fact that the break-even point is having unit sales of 12, 500. The company is even considering paying the store manager an additional commission, an incentive commission of 75 cents. If this change is made, the new break-even point will be 13, 333 in unit sales and $399,990 in dollar sales. Another alternative being considered is paying the store manager a 50 cent commission on each shoe sold in excess of the break-even point. Being that 2,500 shoes were sold in excess of the 12, 500 shoes needed to break-even, the operating income has increased and is now approximately $40,000.
Lastly, eliminating sales commissions entirely in the shops and increasing fixed salaries by
$31,500 annually will make the break-even point for units sold 11, 000 and dollar sales

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