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 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.
$ 80.00
34.50
20.50
$ 55.00
Sales price
Per unit variable expenses
Purchase cost
Sales commissions
Total per unit variable costs
Total annual fixed expenses
Advertising
Rent
Salaries
Total fixed expenses
$187,500
193,000
306,250
$686,750
Required:
1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars.
2. If Bubba's sells 28,000 hats, what is its before-tax income or loss? Support your answer by preparing a contribution income
statement
3. If Bubba's sells 41,000 hats, what is its margin of safety (MOS) in dollars and MOS ratio?
4. Bubba is considering the elimination of sales commissions completely and increasing salaries by $234,625 annually. What would be
the new breakeven point in units? What would be the before-tax income or loss if 28,000 hats are sold with the new salary plan?