Mary Willis is the advertising manager for Bargain Shoe Store. She is currently
ID: 2427470 • Letter: M
Question
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 $28,270 in fixed costs to the $280,240 currently spent. In addition, Mary is proposing that a 5% price decrease ($42 to $40) will produce a 18% increase in sales volume (20,370 to 24,037). Variable costs will remain at $26 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.
(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. (Round answers to 0 decimal places, e.g. 1,225.)
(b) 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%.)
(c) Prepare a CVP income statement for current operations and after Mary’s changes are introduced.
BARGAIN SHOE STORE
CVP Income Statement
Current
New
Current break-even point17515
pairs of shoes New break-even point21734
pairs of shoesExplanation / Answer
Bargain Shoe Store Details Current Proposed Units sales price 42 40 Variable cost /unit 26 26 Contribution margin /unit 16 14 Fixed cost 280,240 308,510 BEP in units 17,515 22,036 Units sold 20,370 24,037 Margin of safety in units= 2,855 2,001 Margin of safety in %= 14% 8% CVP Income statement for operation after Mary's changes introduced Details Amt $ Sales Revenue 961,480 Less Variable costs 624,962 Contribution Margin 336,518 Less Fixed costs 308,510 Net Operating Income 28,008
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