Weygandt, Financial & Managerial Accountingr e tice Gradebook ORION Downloadable

Question

Weygandt, Financial & Managerial Accountingr e tice Gradebook ORION Downloadable eTextbook ment IMISSAGE MY INSTRUCTOR 'ULL SCRI EN PRIN" R VERSON ‘BACK Problem 19-4A Mary 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 $32,400 in fixed costs to the $417,000 currently spent. In addition, Mary 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 S36 per pair of shoes. Management is impressed with Mary's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. Compute the current break-even point in units, and compare it to the break-even point in units if Mary's ideas are used. (Round answers to O decimal places, e.g. 1,225.) Current break-even point New break-even point pairs of shoes pairs of shoes Compute the margin of safety ratio for current operations and after Mary's changes are introduced. (Round answers to 0 decimal places, e.g. 15%.) Current margin of safety ratio New margin of safety ratio INK TO TEXT LINK TO TEXE LINK TO TEX 4, 2:22 PM 9/27/2018 earch

Explanation / Answer

Solution :

Working:

Current Break even point

= current fixed cost/ current contribution per shoe

= $417,000 / ($60 - $36)

= $417,000 / $24

= 17,375 pairs of shoes

New break even point

= new fixed cost / new contribution per shoe

= $449,400 / ($57 - $36)

= 21,400 pairs of shoes

Working:

Current margin of safety ratio

= [ Sales volume - break even point] /sales volume x100

= [ 20,000 - 17,375] / 20,000 x100

= 2,625/20,000x100

= 13%

New margin of safety ratio

=[ Sales volume - Break even point]/sales volume x100

= [ 24,000 - 21,400] /24,000x100

= 2,600/24,000x100

= 11%

CVP INCOME STATEMENT

864,000

Should you make changes suggested --- No

Current Break even point 17,375 pairs of shoes New Break even point 21,400 pairs of shoes

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