Jane Greinke is the advertising manager for Payless Shoe Store. She is currently

Question

Jane Greinke is the advertising manager for Payless 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 $24000 in fixed costs to the $210000 currently spent. In addition, Jane is proposing that a 20/3% price decrease (from $30 to $28) will produce an increase in sales volume from 16000 to 20000 units. Variable costs will remain at $15 per pair of shoes. Management is impressed with Jane'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 Jane's ideas are used.

b) Compute the margin of safety ratio for current operations and after Jane's changes are introduced. (Round to nearest full percent.)

c) Prepare a CVP income statement for current operations and after Jane's changes are introduced. Would you make the changes suggested?

Explanation / Answer

C) CVP income statement for current operations and after Jane's changes are introduced. Details                                                   Old                       New                                                           ----------            --------------- Sales Revenue(16,000 * 30)        $ 4,80,000                 $ 5,60,000                        (20,000 * 28 Variable cost @15 per pair             2,40,000                    3,00,000                                                   ---------------           ----------------- Contribution margin                          2,40,000                   2,60,000 Fixed costs                                       2,10,000                   2,34,000                                                   ---------------          ------------------- Net income                                          30,000                      24,000                                                    ---------------         ------------------- Here the fixed costs are increased. Hence, the net income is low when we are compared to after janes ideas are used. If fixed costs are remain ,then the profit will be increased. a. Current break-even point in units =Fixed costs / Contribution margin per unit                                                        =2,10,000/15       (2,40,000/16,000)                                                         = 14,000 units New break-even point when janes ideas are used. Break even-point in units = Fixed costs/Contribution margin per unit                                        =2,34,000/13                     (2,60,000/20,000)                                        = 18,000 units b. Margin of safety for current operations Actual Sales - Break-even sales = Margin of safety in Dollars 4,80,000 - 4,20,000 = 60,000 Margin of safety in Dollars / Actual Sales = Margin of Safety Ratio 60,000/4,80,000=12.5% Margin of safety when janes ideas are used Actual Sales - Break - even Sales = Margin of Safety in Dollars 5,60,000 - 5,04,000=56,000 Margin of safety in Dollars/Actual Sales = Margin of Safety Ratio 56,000/5,60,000=10% c. All the remaining are satisfactory.

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