Running head: BASIC CVP ANALYSIS 1

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Basic CVP Analysis

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Eileen Johnson
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Ashford University
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Managerial Accounting BUS 630

Gregory Goussak
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Basic CVP Analysis

Complete the following exercise (Problem 4-21) and submit to your instructor.
The Fashion Shoe Company operates a chain of women’s shoe shops around the country.

The shops carry many styles of shoes that are all sold at the same price. Sales personnel in

the shops are paid a substantial commission on each pair of shoes sold (in addition to a

small basic salary) in order to encourage them to be aggressive in their sales efforts.

The following worksheet contains cost and revenue data for Shop 48 and is typical of the

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company’s many outlets:

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Selling price $ 30.00
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Variable expenses:
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Invoice cost $ 13.50

Sales commission 4.50

Annual
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Fixed expenses:
Advertising $ 30,000
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Rent 20,000
Salaries 100,000
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Total fixed expenses $ 150,000

unit contribution margin (12.00). The unit contribution margin is the selling price (30.00) minus

the variable cost (18.00). The break-even point in unit sales is 12,500. To determine the break-

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 BASIC CVP ANALYSIS 3

even point in dollar sales we multiply the break-even point in unit sales (12,500) by the selling

price (30.00) and get $375,000 to be the break-even point in dollar sales.

 Prepare a CVP graph showing cost and revenue data for Shop 48 from zero shoes up

to 17,000 pairs of shoes sold each year. Clearly indicate the break-even point on the

graph.

Break-even Point

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 If 12,000 pairs of shoes are sold in a year, what would be Shop 48's net operating
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income or loss?
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Total sales (12,000) multiplied by the cost per shoe (30.00) would equal the total revenue
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(360,000). From the total revue the fixed expenses (150,000), variable expenses (12,000 pairs of

shoes multiplied by the variable cost per shoe is equal to 216,000), and contribution margin
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(144,000) are subtracted. The net operating loss for Shop 48 if 12,000 pairs of shoes is sold in a

year would be $6000.00.

 The company is considering paying the store manager of Shop 48 an incentive

commission of Shop 48 an incentive commission of 75 cents per pair of shoes (in

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addition to the salesperson's commission). If this change is made, what will be the

new break-even point in dollar sales and in unit sales?

To calculate the break-even point in unit sales the fixed cost (150,000) is divided by the

unit contribution margin (11.25). The unit contribution margin is the selling price (30.00) minus

the variable cost (18.00 plus .75). The break-even point in unit sales is 13.333. To determine the

break-even point in dollar sales we multiply the break-even point in unit sales (13,333) by the

selling price (30.00) and get $399,990 to be the break-even point in dollar sales.

 Refer to the original data. As an alternative to (4) above, the company is considering

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paying the store manager 50 cents commission on each pair of shoes sold in excess of

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the break-even point. If this change is made, what will be the shop's net operating

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income or loss if 15,000 pairs of shoes are sold?
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Total sales (15,000) multiplied by cost per shoe (30.00) equals total revue (450,000).
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From the total revue the fixed expenses (150,000), variable expenses (12,500 pairs multiplied by
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18.00 unit contribution margin plus 2,500 pairs multiplied by 18.50 unit contribution margin to

include commission equals 271,250), and contribution margin is subtracted to equal $28,750.
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The shop's net operating income if 15,000 pairs of shoes is sold would be $28,750.
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 Refer to the original data. The company is considering eliminating sales

commissions entirely in its shops and increasing fixed salaries by $31,500 annually.
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If this change is made, what will be the new break-even point in dollar sales and in

unit sales for Shop 48? Would you recommend that the change be made? Explain.
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To calculate the break-even point in unit sales the fixed cost (181,500 is divided by the

unit contribution margin (16.50). The unit contribution margin is the selling price (30.00) minus

the variable cost (13.50). The break-even point in unit sales is 11,000. To determine the break-

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 BASIC CVP ANALYSIS 5

even point in dollar sales we multiply the break-even point in unit sales (11,000) by the selling

price (30.00) and get $330,000 to be the break-even point in dollar sales.

The change would lower the breakeven point by 1,500 pairs of shoes and the breakeven

dollar amount by $45,000. From this standpoint it appears to be profitable to the company,

however the sales staff no longer are being paid-for-performance and therefore has less incentive

to sell shoes. The break-even point would be lower, but would the sales continue to be as high

or would staff be not as motivated since their pay would be the same regardless? Management

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must consider other factors as well when attempting to lower the break-even point. Raising the

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price of the shoes could also lower the break-even point. Overall, I think your higher performing

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sales staff would be discouraged and would not try as hard. Considering this, the change would
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not be recommended.
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References
Buchenroth. P. (2006, May). Driving Performance: Making Pay Work for the Organization.

Compensation and Benefits Review, 38(3), 30-35,4. Retrieved May 17, 2012, from

ABI/INFORM Global. (Document ID: 1045888951).

Kimmel, P., Weygandt, J., Kimmel, P., & Kieso, D. (2010). Financial Accounting: Tools for

Business Decision Making (6th ed). John Wiley & Sons, Inc.

Noreen, E. W., Brewer, P. B., & Garrison, R. H. (2011). Managerial Accounting for Managers

(2nd ed.). New York, New York: McGraw Hill.

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