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.

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

CVP Income Statement


Current New
Sales
Variable expenses
Contribution margin
Fixed expenses
Net income

Would you make the changes suggested?

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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