Problem 5-30 (Algo) Graphing; Incremental Analysis; Operating Leverage [LO5-2, LO5-4, LO5-5, LO5-6, LO5-8]

[The following information applies to the questions displayed below.]

Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. In time, she hopes to open a chain of sandal shops. As a first step, she has gathered the following data for her new store:

Sales price per pair of sandals	$ 32
Variable expenses per pair of sandals	16
Contribution margin per pair of sandals	$ 16
Fixed expenses per year:
Building rental	$ 9,600
Equipment depreciation	12,000
Selling	9,600
Administrative	16,800
Total fixed expenses	$ 48,000

1. What is the break-even point in unit sales and dollar sales? (Do not round intermediate calculations.)

2. Angie has decided that she must earn a profit of $16,000 the first year to justify her time and effort. How many pairs of sandals must be sold to attain this target profit?

3. Refer to the original data. During the first year, the store sold only 3,500 pairs of sandals and reported the following operating results:

Sales (3,500 pairs)	$ 112,000
Variable expenses	56,000
Contribution margin	56,000
Fixed expenses	48,000
Net operating income	$ 8,000

a. What is the stores degree of operating leverage?

b. Angie is confident that with a more intense sales effort and with a more creative advertising program she can increase unit sales by 50% next year. Using the degree of operating leverage, what would be the expected percentage increase in net operating income if Angie is able to increase unit sales by 50%?