Oriole Willis is the advertising manager for Bargain Shoe Store. She is currentl

Question

Oriole Willis is the advertising manager for Bargain Shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased display space that will add $ 39,000 in fixed costs to the $ 423,000 currently spent. In addition, Oriole is proposing that a 5% price decrease ($ 60 to $ 57) will produce a 20% increase in sales volume ( 20,000 to 24,000). Variable costs will remain at $ 36 per pair of shoes. Management is impressed with Oriole’s ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

Prepare a CVP income statement for current operations and after Oriole’s changes are introduced.

sales current new

variable expense

contribution margin

net income

Explanation / Answer

Given data:

New sales units           =24,000

New selling price        = $ 57

Variable cost               = $ 36

Fixed cost 423,000+39,000 =462,000

Answer:

Sales current new = (24,000*$ 57) = $ 1,368,000

-Variable cost        = (24,000*$ 36) = $   864,000

= Contribution       = (24,000* $21) = $ 504,000

-Fixed cost               =                         = $ 462,000

= Net income          =                         = $    42,000

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