CVP Analysis; Strategy 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 priceand purchase cost, as shown in the following table. Sales personnel receive a commission to encourage them to be more aggressive in their sales efforts. Currently, the Lubbock economy is really humming, and sales growth at Bubba’s has been great. The business is very competitive, however, andBubba, the owner, has relied on his knowledgeable and courteous staff to attract and retain customerswho otherwise might go to other western wear stores. Because of the rapid growth in sales, Bubbais also finding the management of certain aspects of the business more difficult, such as restockinginventory and hiring and training new salespeople.Sales price $ 80.00Per unit variable expensesPurchase cost 43.50Sales commissions 11.50Total per unit variable costs $ 55.00Total annual fixed expensesAdvertising $ 98,500Rent 146,500Salaries 255,000Total fixed expenses $500,000Required1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars. 2. If Bubba’s sells 22,000 hats, what is its before-tax income or loss? Support your answer by constructinga contribution income statement.3. If Bubba’s sells 32,000 hats, what is its margin of safety (MOS) and MOS ratio? Of what interpretivevalue are these two measures?4. Bubba is considering the elimination of sales commissions completely and increasing salaries by$157,000 annually. What would be the new breakeven point in units? What would be the before-taxincome or loss if 22,000 hats are sold with the new salary plan?5. Identify and discuss the strategic and ethical issues in the decision to eliminate sales commissions (seerequirement 4). How do these strategic concerns affect Bubba’s decision?
CVP Analysis; Strategy 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 purchase cost, as shown in the following table. Sales personnel receive a commission to encourage them to be more aggressive in their sales efforts. Currently, the Lubbock economy is really humming, and sales growth at Bubba’s has been great. The business is very competitive, however, and
Bubba, the owner, has relied on his knowledgeable and courteous staff to attract and retain customers
who otherwise might go to other western wear stores. Because of the rapid growth in sales, Bubba
is also finding the management of certain aspects of the business more difficult, such as restocking
inventory and hiring and training new salespeople.
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
Required
1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars.
2. If Bubba’s sells 22,000 hats, what is its before-tax income or loss? Support your answer by constructing
a contribution income statement.
3. If Bubba’s sells 32,000 hats, what is its margin of safety (MOS) and MOS ratio? Of what interpretive
value are these two measures?
4. Bubba is considering the elimination of sales commissions completely and increasing salaries by
$157,000 annually. What would be the new breakeven point in units? What would be the before-tax
income or loss if 22,000 hats are sold with the new salary plan?
5. Identify and discuss the strategic and ethical issues in the decision to eliminate sales commissions (see
requirement 4). How do these strategic concerns affect Bubba’s decision?
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