Bubba’s Western Wear is a western hat retailer in Lubbock,Texas. Although Bubba’s carries numerous styles of western hats,each hat has approximately the same price and invoice (purchase)cost, as shown in the following table. Sales personnel receive acommission to encourage them to be more aggressive in their salesefforts. Currently, the Lubbock economy is really humming, andsales growth at Bubba’s has been great. The business is verycompetitive, however, and Bubba, the owner, has relied on hisknowledgeable and courteous staff to attract and retain customerswho otherwise might go to other western wear stores. Because of therapid growth in sales, Bubba is also finding the management ofcertain aspects of the business more difficult, such as restockinginventory and hiring and training new salespeople.
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| Sales price | $ | 80.00 | |
| Per unit variable expenses | | | |
| Purchase cost | | 43.50 | |
| Sales commissions | | 11.50 | |
| Total per unit variable costs | $ | 55.00 | |
| Total annual fixed expenses | | | |
| Advertising | $ | 98,500 | |
| Rent | | 146,500 | |
| Salaries | | 255,000 | |
| Total fixed expenses | $ | 500,000 | |
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Required:
1. Calculate the annual breakeven point, both in terms of unitsand in terms of sales dollars.
2. If Bubba’s sells 22,000 hats, what is its before-tax incomeor loss? Support your answer by preparing a contribution incomestatement.
3. If Bubba’s sells 32,000 hats, what is its margin of safety(MOS) and MOS ratio?
4. Bubba is considering the elimination of sales commissionscompletely and increasing salaries by $157,000 annually. What wouldbe the new breakeven point in units? What would be the before-taxincome or loss if 22,000 hats are sold with the new salaryplan?
