P3–15 Graphing; incremental analysis; operating leverage Time allowed: 60 minutes Time allowed: 60 minutes Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. Angie has just received a degree in business and she is anxious to apply the principles she has learned to her business. In time, she hopes to open a chain of sandal shops. As a first step, she has prepared the following analysis for her new store:

Required 1 How many pairs of sandals must be sold each year to break even? What does this represent in total pound sales?
2 Angie has decided that she must earn at least £18,000 the first year to justify her time and effort. How many pairs of sandals must be sold to reach this target profit?
3 Angie now has two salespersons working in the store – one full time and one part time. It will cost her an additional £8,000 per year to convert the part-time position to a full-time position. Angie believes that the change would bring in an additional £25,000 in sales each year. Should she convert the position? Use the incremental approach (do not prepare a profit and loss account).
4 Refer to the original data. During the first year, the store sold only 3,000 pairs of sandals and reported the following operating results:

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

(b) Angie is confident that with a more intense sales effort and with a more creative advertising programme she can increase sales by 50%
next year. What would be the expected percentage increase in profit?
Use the degree of operating leverage to compute your answer.

Sales price per pair of sandals 40 Variable expenses per pair of sandals 16 Contribution margin per pair of sandals 24 Fixed expenses per year: Building rental 15,000 Equipment depreciation 7,000 Selling Administrative Total fixed expenses 20,000 18,000 60,000