School Kids' ShoeStore Expanded the Size of Its Store in Westfield

Essay

School Kids' ShoeStore expanded the size of its store in Westfield, NJ two months ago. The owner, Montgomery Brown, has asked you to develop an analysis of the cost structure in his store, as a basis for assessing the profitability of his business. He provides you with account data for the most recent month, which he explains is representative of what these costs are in most months of the year; there is not much seasonality in his business. Last month, May, 890 pairs of shoes were sold. This month Montgomery expects to sell 1,100 pairs of shoes.NOTE: Assume that Mr. Brown purchases promptly on a day-to-day basis to replace inventory, so that the level of inventory remains constant.
Required:
(1) Develop the cost equation for Mr. Brown's store, using the account classification method, assuming that the cost object is each pair of shoes.
(2) Mr. Brown plans to increase sales by 25% next month, July, by reducing the price of his shoes. Assuming a 25% increase in sales, what is the lowest price Mr. Brown can sell his shoes for if he wants to meet all costs plus make $1 profit per pair of shoes?
(3) What would the profit per pair of shoes be if sales actually increased by only 15% and the shoes were sold at the price calculated in (2)?