Jim Sandalwood has recently opened The Sandal Hut in Brisbane,Australia, a store that specializes in fashionable sandals. Jim hasjust received a degree in business and he is anxious to apply theprinciples he has learned to his business. In time, he hopes toopen a chain of sandal shops. As a first step, he has prepared thefollowing analysis for his new store:

Sales price per pair of sandals	$	50.00
Variable expenses per pair of sandals		30.00
Contribution margin per pair of sandals	$	20.00
Fixed expenses per year:
Building rental	$	18,000
Equipment depreciation		6,000
Selling		32,000
Administrative		34,000
Total fixed expenses	$	90,000

Required:

1.	How many pairs of sandals must be sold to break even? What doesthis represent in total dollar sales?

    

3.	Jim has decided that he must earn at least $25,000 the firstyear to justify his time and effort. How many pairs of sandals mustbe sold to reach this target profit?

4.	Jim now has one salesperson working in the store -- one parttime. It will cost him an additional $12,000 per year to convertthe part-time position to a full-time position. Jim believes thatthe change would bring in an additional $80,000 in sales each year.Should he convert the position? Use the incremental approach.
	Yes No

5.	Refer to the original data. During the first year, the storesold only 5,250 pairs of sandals and reported the followingoperating results:

Sales (5,250 pairs)	$	262,500
Less variable expenses		157,500
Contribution margin		105,000
Less fixed expenses		90,000
Net operating income	$	15,000

a.	What is the store’s degree of operating leverage?

b.	Jim is confident that with a more intense sales effort and witha more creative advertising program he can increase sales by 10%next year. What would be the expected percentage increase in netoperating income? Use the degree of operating leverage concept tocompute your answer.