Svetlana Pace is the advertising manager for Bargain Shoe Store. She is currentl
ID: 2353541 • Letter: S
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.a. Compute the margin of safety ratio for current operations and after Svetlana's changes are introduced.
b. Prepare a CVP income statement for current operations and after Svetlana's changes are introduced.
BARGAIN SHOE STORE
Explanation / Answer
Old breakeven point = 266,700/(41-23) =14,816.67 units Old margin of safety =18,440 - 14,816.67 = 3,623.33 New breakeven point =( 266,700+36,320 )/(39-23)= 18,938.75 New margin of safety = 22,128 - 18,938.75 = 3,189.25 yes, ,margin of safety will decrease and breakeven point will decrease.
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