Exercise 4 Mike is the advertising manager for Penny Book Store. He is currently
ID: 2395203 • Letter: E
Question
Exercise 4 Mike is the advertising manager for Penny Book Store. He is currently working on a major promotional campaign. His ideas include the installation of a new lighting system and increased display space that will add $20,000 in fixed costs to the $162,000 currently spent. In addition, Mike is proposing that a 666% price decrease (from S30 to S28) will produce an increase in sales volume from 16,000 to 20,000 units. Variable costs will remain at $18 per book Management is impressed with Mike's ideas but concemed about the effects that these changes will have on the break-even point and the margin of safety Calculate the current break-even point in units, and compare it to the break-even point in units if Mike's ideas are used. Also, compute the margin of safety ratio for current operations and after Mike's changes are introduced Prepare an income statement for curent operations and after Mike's changes are introduced. Would you make the changes suggestedExplanation / Answer
Current Plan
Mike Plan
A. Variable cost
18 per unit
18 per unit
B. Fixed cost
$162,000
$182,000
C. Selling price
$30 per unit
$28 per unit
D. Sales in units
16,000 units
20,000 units
INCOME STATEMENT
E. Sales (C X D)
$480,000
$560,000
F. Variable cost (A X D)
$288,000
$360,000
G. Contribution (E-F)
$192,000
$200,000
H. Fixed cost
$162,000
$182,000
I. Net profit (G-H)
$30,000
$18,000
Calculation of Breakeven point and Margin of safety ratio
J. Contribution per unit =G/D
$12
$10
K. Breakeven point in units
(Fixed cost/contribution per unit) = H/ J
13,500 unit
15,167 units
L. Margin of safety = (Sales- BEP) = (E-K)
2500 units
4833 units
M. Margin of safety ratio = (L/D)
15.62%
24.16%
Current Plan
Mike Plan
A. Variable cost
18 per unit
18 per unit
B. Fixed cost
$162,000
$182,000
C. Selling price
$30 per unit
$28 per unit
D. Sales in units
16,000 units
20,000 units
INCOME STATEMENT
E. Sales (C X D)
$480,000
$560,000
F. Variable cost (A X D)
$288,000
$360,000
G. Contribution (E-F)
$192,000
$200,000
H. Fixed cost
$162,000
$182,000
I. Net profit (G-H)
$30,000
$18,000
Calculation of Breakeven point and Margin of safety ratio
J. Contribution per unit =G/D
$12
$10
K. Breakeven point in units
(Fixed cost/contribution per unit) = H/ J
13,500 unit
15,167 units
L. Margin of safety = (Sales- BEP) = (E-K)
2500 units
4833 units
M. Margin of safety ratio = (L/D)
15.62%
24.16%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.