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 $36,320 in fixed costs to the $266,700 currently spent. In addition, Svetlana is proposing that a 5% price decrease ($41 to $39) will produce a 20% increase in sales volume (18,440 to 22,128). Variable costs will remain at $23 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.

Explanation / Answer

Current Scene : SP pu $41 Less VC pu $23 -------------------- Cont pu $18 So Current BEP = FC/Cont pu = 266,700/18 = 14,817 units Current Sales = 18440 units SO Margin of Safety (MOS) = budgeted sales –break-even sales ie MOS = 18440 - 14817 = 3623 units MOS in $$$ = 3623*$41 = $148,543 Post new System: SP pu $39 Less VC pu $23 -------------------- Cont pu $16 So New BEP = FC/Cont pu = (266,700+36320)/16 = 18939 units New Sales = 22128 units SO Margin of Safety (MOS) = budgeted sales –break-even sales ie MOS = 22128-18939 = 3189 units MOS in $$$ = 3189*$39 = $124,381 Idea is Not Good. It has increased BEP from 14817 to 18939. Also MOS has reduced from $148543 to $124381

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