Svetlana Pace is the advertising manager for Bargain Shoe Store. She is currentl

Question

Svetlana Pace 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 $38,230 in fixed costs to the $274,220 currently spent. In addition, Svetlana is proposing that a 5% price decrease ($38 to $36) will produce a 20% increase in sales volume (19,710 to 23,652). Variable costs will remain at $21 per pair of shoes. Management is impressed with Svetlana'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 svetlanas ideas are used.

Current Break even point  ________pairs of shoes

New Break even point   _________pairs of shoes

Compute the margin of safety ratio for current operiations and after svetlanas changes are introduce.

Current Percentage _____%

New Percentage   _____%

Prepare CVP income statement for current operations and after Svetlanas changes are introduced.

BARGAIN SHOE STORE

CVP Income Statement

                                     Current                   New

Sales                       __________          __________

Variable Expenses __________          __________

Contribution margin __________          __________

Fixed Expenses     __________          __________

Net Income             __________          __________

Would you make the changes suggested? Y/N?

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Current Break even point = 274220/(38-21) = 16130.59 or 16131 Pairs

New Break Even Point = (274220 + 38230)/(36-21) = 20830 Pairs

Part B:

Current Percentage = Sales - Break Even Sales/Sales*100 = (19710*38 - 16131*38)/(19710*38) = 18.16% or 18%

New Percentage = Sales - Break Even Sales/Sales*100 = (23652*36 - 20830*36)/(23652*36) = 11.93% or 12%

Part C:

No, the suggested changes should not made.

Thanks.

Current New Sales 748980 851472 Less Variable Costs 413910 496692 Contribution 335070 354780 Less Fixed Costs 274220 312450 Net Income 60850 42330

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