# www.vustudents.ning.com

Foot Design Company specializes in making designers shoes in Lahore and Karachi. It sends Shoes to its agent - Shoe Mart. Company sells one article at Rs.900. Until last month, Foot Design paid Shoe Mart a commission of 10% of the shoe price paid by each customer. This commission was Shoe Mart’s only source of revenues. Shoe Mart’s fixed costs are Rs.14, 000 per month (for salaries, rent, and so on), and its variable costs are Rs.20 per shoe purchased.  Foot Design Company has just announced a revised payment schedule for all agents. It will now pay agents a 10% commission per shoe up to a maximum of Rs.50. An article costing more than Rs.500 generates only Rs.50 commission, regardless of the shoe price.

Required:

1. 1.      Under the existing 10% commission structure, how many pairs of shoes must Shoe Mart sell each month to (a) break-even; and (b) earn any operating income of Rs. 7,000?     (1.5)
2. 2.      How does Foot Design’s revised payment schedule affect your answers to (a) and (b) in (1) above?                    (2)
3. Does this change in the company policy have positive effect on the commission agent’s business? Give your comments?                                   (1.5)

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Definition of 'Cost-Volume Profit Analysis'

A method of cost accounting used in managerial economics. Cost-volume profit analysis is
based upon determining the breakeven point of cost and volume of goods. It can be useful
for managers making short-term economic decisions, and also for general educational
purposes.

explains 'Cost-Volume Profit Analysis'

Cost-volume profit analysis makes several assumptions in order to be relevant. It often
assumes that the sales price, fixed costs and variable cost per unit are constant.
Running this analysis involves using several equations using price, cost and other
variables and plotting them out on an economic graph.

CVP analysis has following assumptions:

All cost can be categorized as variable or fixed.
Sales price per unit, variable cost per unit and total fixed cost are constant.
All units produced are sold.
Where the problem involves mixed costs, they must be split into their fixed and variable
component by High-Low Method, Scatter Plot Method or Regression Method.

CVP Analysis Formula

The basic formula used in CVP Analysis is derived from profit equation:

px = vx + FC + Profit
In the above formula,
p is price per unit;
v is variable cost per unit;
x are total number of units produced and sold; and
FC is total fixed cost

Besides the above formula, CVP analysis also makes use of following concepts:

Contribution Margin (CM)

Contribution Margin (CM) is equal to the difference between total sales (S) and total
variable cost or, in other words, it is the amount by which sales exceed total variable
costs (VC). In order to make profit the contribution margin of a business must exceed its
total fixed costs. In short:

CM = S − VC
Unit Contribution Margin (Unit CM)

Contribution Margin can also be calculated per unit which is called Unit Contribution
Margin. It is the excess of sales price per unit (p) over variable cost per unit (v).
Thus:

Unit CM = p − v
Contribution Margin Ratio (CM Ratio)

Contribution Margin Ratio is calculated by dividing contribution margin by total sales or
unit CM by price per unit.

Contribution Margin'

A cost accounting concept that allows a company to determine the profitability of individual products.

It is calculated as follows:

Product Revenue - Product Variable Costs
Product Revenue

The phrase "contribution margin" can also refer to a per unit measure of a product's gross operating margin, calculated simply as the product's price minus its total variable costs.

## explains 'Contribution Margin'

Consider a situation in which a business manager determines that a particular product has a 35% contribution margin, which is below that of other products in the company's product line. This figure can then be used to determine whether variable costs for that product can be reduced, or if the price of the end product could be increased.

If these options are unattractive, the manager may decide to drop the unprofitable product in order to produce an alternate product with a higher contribution margin.

can i get the solution please......:)

Shazia zaman you can not.... just idea.... for question 1:

part a)   200 shoes

part b)   300 shoes

for question 2:

part a)   467 shoes

part b)   700 shoes can you please show the rough working of this

10% commission ko kesy adjust karna hai?

Dear Students Don’t wait for solution post your problems here and discuss ... after discussion a perfect solution will come in a result. So, Start it now, replies here give your comments according to your knowledge and understandings....

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