P18-4A Mary Willis is the advertising manager for Bargain Shoe Store. She is cur

Question

P18-4A Mary Willis is the advertising manager for Bargain Shoe Store. She is currently Compute break-even point and working on a major promotional campaign. Her ideas include the installation of a new light- margin of safety ratio, and ing system and increased display space that will add $24,000 in fixed costs to the $270,000 prepare a CVP income statement currently spent. In addition, Mary is proposing that a 5% price decrease ($40 to $38) will before and after changes in produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at business emironment. $24 per pair of shoes. Management is impressed with Mary's ideas but concerned about (LO 3, 4,5),E the effects that these changes will have on the break-even point and the margin of safety Instructions (a) Compute the current break-even point in units, and compare it to the break-even point in units if Mary's ideas are used are introduced. (Round to nearest full percent.) troduced. (Show column for total amounts only.) Would you make the changes suggested? (b) Compute the margin of safety ratio for current operations and after Mary's changes (b) Current margin of safety ratio 16% (c) Prepare a CVP income statement for current operations and after Mary's changes are in-

Explanation / Answer

Current Revised Selling price 40 38 Less: Variable cost per unit 24 24 Contribution margin per unit 16 14 Fixed cost 270000 294000 Units sold 20000 24000 Total sales 800000 912000 Break even in units 16875 21000 (Fixed cost / CM per unit) Margin of Safety in units 3125 3000 % of MOS to total sales 16.00% 13.00% (MOS/sales units) CVP Income Statement Current Revised Sales revenue 800000 912000 Less: Variable cost 480000 576000 Contribution margin 320000 336000 Less: Fixed cost 270000 294000 Net income 50000 42000 Hence changes shall not be acceptable

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