The Walk Rite Shoe Company operates a chain of shoe stores. The stores sell ten different styles of inexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. Walk Rite is trying to determine the desirability of opening another store, which is expected to have the following revenue and cost relationships:
The Correct Answer and Explanation is:
To assess the desirability of opening a new Walk Rite Shoe Company store, we need to perform a cost-volume-profit (CVP) analysis based on the revenue and cost structure of a typical store. While you mentioned revenue and cost relationships, the actual numerical data is missing from your prompt. However, I will outline a typical example and explanation assuming common cost and revenue structures, and you can adjust based on your actual data.
Assumed Revenue and Cost Structure (Per Month):
- Selling price per unit (pair of shoes): $50
- Variable cost per unit (includes purchase, shipping): $30
- Contribution margin per unit: $20
- Expected unit sales per month: 1,500 units
- Sales commission per unit: $2
- Fixed costs (store manager + rent + utilities): $20,000
CVP Analysis:
- Contribution Margin Per Unit: Selling Price−Variable Cost−Sales Commission=50−30−2=18\text{Selling Price} – \text{Variable Cost} – \text{Sales Commission} = 50 – 30 – 2 = 18
- Monthly Total Contribution Margin: 1,500 units×18=27,0001,500 \text{ units} \times 18 = 27,000
- Net Operating Income (NOI): 27,000−20,000=7,00027,000 – 20,000 = 7,000
Conclusion:
Based on the above analysis, the proposed store would generate a monthly profit of $7,000, indicating it would be a financially viable investment under these assumptions.
Explanation:
Walk Rite Shoe Company is considering expanding its retail operations by opening a new store. To make an informed decision, a cost-volume-profit (CVP) analysis helps determine whether the store can generate sufficient profit to justify the investment. In this case, the company sells shoes at a fixed price, with known variable costs and commissions, making it suitable for such analysis.
The contribution margin is calculated by subtracting the variable costs and commission from the selling price. This margin represents the amount available from each sale to cover fixed costs and generate profit. With an assumed contribution margin of $18 per pair and estimated monthly sales of 1,500 units, the store would produce $27,000 in contribution margin.
From this, fixed costs such as manager salaries, rent, and utilities (estimated at $20,000 per month) are deducted. The resulting net operating income of $7,000 suggests the store would not only break even but also earn a positive return each month.
This analysis shows that the store has the potential to be a profitable venture, assuming the projected sales volume and cost structure are accurate. Walk Rite should still consider location factors, local competition, and long-term demand before proceeding. However, from a financial standpoint alone, the CVP analysis supports opening the new store.
If you provide the actual revenue and cost figures, I can give a precise answer tailored to those numbers.
