Basic CVP Analysis - Fashion Shoe Company - Assignment Example

In the current methodology of commissions for the front-line salesmen, the annual break-even point in dollar sales and in unit sales for Shop 48 is sales of 12,500 pairs of shoes for gross sales of $375,000. Appendix 1 shows a graph from zero to seventeen thousand units sold in a given year, with both fixed and variable expenses taken into account. Based upon projected annual sales of 17,000 pairs of shoes, the potential profit for Shop 48 would be $54,000 on annual sales of $510,000. Another question raised was what the profit or loss would be on 12,000 pairs yearly. After expenses, the store would realize a net loss of $6,000.

In the next circumstance, the company is toying with the idea of offering the store manager of Shop 48 an incentive commission of $0.75 (seventy-five cents) per pair of shoes, leaving the salespersons’ commission intact. What would this added commission have on the break-even point in dollar sales and in unit sales? It is clearly shown that the break-even point would indeed rise considerably. Technically there would be no “break-even point”, for at 13,333 pairs the shop would be operating at a loss of $3.75 and one more pair (13,334) would give them a net profit of $7.50. Either way, sales would have to be roughly $400,000 per annum to achieve a profit or an increase of $25,000 in gross sales annually.

As another option to the situation above, what if the store manager was given fifty cents commission on each pair of shoes sold beyond the break-even point? Their question on this was what the shop's net operating income would be based upon 15,000 pairs of shoes sold annually. This would include the data as discussed for current operations in that 12,500 pairs of shoes for gross sales of $375,000 is the BE point. With this, 15,000 pairs of shoes would give the store gross sales of $450,000 annually. With the added expense of the fifty-cent commission on 2,500 pairs, net profit would then be reduced to $22,500.

The final scenario for the company would be to do away with commissions entirely, for both the manager and the salesmen, while raising the salary for the salesmen. It is true the break-even point would be lowered by almost 2,000 units, 10,970 pairs for $329,100 in gross sales. If it was based on the pure profit that would on the surface seem to be the logical choice. However, I would not suggest this tactic be employed. If the salesman is getting the same salary whether he sells a pair of shoes or not, some would develop a lackadaisical attitude and sales might actually decrease. On the other hand, commissioned salesmen might convince the lady who only wanted one pair to actually purchase two that day. Read More