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# Graphing; Incremental Analysis Operating Leverage Teri Hall has recently opened Sheer Elegance Inc a store specializing in fashionable stockings Ms Hall has just completed a course in managerial

Graphing; Incremental Analysis; Operating Leverage Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fashionable stockings. Ms. Hall has just completed a course in managerial accounting, and she believes that she can apply certain aspects of the course to her business. She is particularly interested in adopting the cost- volume-profit (CVP) approach to decision making. Thus, she has prepared the following analysis:

Required:

1.       How many pairs of stockings must be sold to break even? What does this represent in total dollar sales?

2.       Prepare a CVP graph or a profit graph for the store from zero pairs up to 70,000 pairs of stock- ings sold each year. Indicate the break-even point on the graph.

3.       How many pairs of stockings must be sold to earn a \$9,000 target profit for the first year?

4.       Ms. Hall now has one full-time and one part-time salesperson working in the store. It will cost her an additional \$8,000 per year to convert the part-time position to a full-time position. Ms. Hall believes that the change would bring in an additional \$20,000 in sales each year. Should she convert the position? Use the incremental approach. (Do not prepare an income statement.)

5.       Refer to the original data. Actual operating results for the first year are as follows:

 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$125,000 Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Net operating income . . . . . . . . . . . . . . . . . . . . . . . . \$ 15,000

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

b.       Ms. Hall is confident that with some effort she can increase sales by 20% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage concept to compute your answer.

Jun 28 2020 View more View Less