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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solution

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?

a)

Fixed Cost = Rs. 14000
Variable Cost = Rs. 20

For break even

CM per unit = Sales - Variable Cost
= 90 - 20
= 70Rs

Fixed Cost = 14000Rs

Break Even = Fixed Cost/CM per unit
= 14000/70
= 200Pairs
b)

To earn profit of 7000

Target CM = 14000+7000

= 21000Rs

So Break Even = 21000/70

= 300 Pairs

2. How does Foot Design’s revised payment schedule affect your answers to (a) and (b) in (1) above?

If Sale Revenue is 50Rs Fixed then

Fixed Cost = 14000Rs

CM per unit = Sales - Variable Cost

= 50 - 20
= 30RS per unit

a) Break Even = Fix Cost/CM per unit

= 14000/30
= 467 Pairs

For Profit of 7000Rs

b) Break Even =Target CM/ CM per unit

Break Even = 21000/30
= 700 Pairs

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