The following details relate to a shop owned by Joan Socks, which currently sells 12,000
Pairs of shoes annually.

Selling price per pair of shoes $80
Purchase cost per pair of shoes $50

Total annual fixed costs:

$
Salaries 80,000
Advertising 40,000
Other fixed expenses 150,000

Required

(a) Calculate the breakeven point and margin of safety in number of pairs of shoes sold;

(b) Assume that 11,000 pairs of shoes were sold in a year. Calculate the shop's net profit (or
Loss);

(c) If a selling commission of $5 per pair of shoes sold was to be introduced, calculate the
Number of pairs of shoes which would need to be sold in a year in order to earn a net
Profit of $50,000;

(d) Assume that for next year an additional advertising campaign costing $20,000 is
Proposed, whilst at the same time selling prices are to be increased by 15%. Calculate
The breakeven point in numbers of pairs of shoes;

This appears to be a home work question. If you had shown your work, some one will surely help you. However, I can show you the steps for solving the problem which is also available in your text book(s).

1. BE Point = Fixed costs/Contribution per unit
2. Net Profit = sales in units x contribution per unit - fixed costs
3. Number of units to be sold to achieve desired profit:
(Desired profit + Total fixed costs)/Revised contribution per unit
4. Revised BEP = Revised fixed costs/revised contribution per unit

Solutions

(a) The Breakeven Point and Margin of Safety;
Q = ($80,000+$40,000+$150,000)/($80 - $50)
Q = $270,000/$30
Q = 9,000 pairs of shoes for break even

Margin of Safety:
Sales (at annual sales of 12,000 pairs of shoes) (a) $960,000
Break-even sales (at 9,000 pairs of shoes) $720,000
Margin of Safety (b) $240,000
Margin of Safety percentage, (b) / (a) 25%



(b) With 11,000 pairs of shoes sold;
11,000 x ($80 - $50) - $270,000
$330,000 - $270,000 = $60,000 net profit


(c) With selling commission of $5 to earn $50,000;
$50,000 = ($80 - $50 - $5) x Q - $270,000
$50,000 = $25 x Q - $270,000
$25 x Q = $50,000+$270,000
Q = $320,000 / $25
Q = 12,800 pairs of shoes


(d) With advertizing campaign and selling price rise;
Q = ($80,000+$40,000+$150,000+$20,000) / ($92 - $50)
Q = $290,000 / $42
Q = 6,905 pairs of shoes to break even

Good show