Wendy Barnes is the advertising manager for Value Shoe Store. She is currently w

Question

Wendy Barnes is the advertising manager for Value 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 $72,144 in fixed costs to the $241,200 currently spent. In addition, Wendy is proposing that a 4% price decrease ($42 to $40.32) will produce a 21% increase in sales volume (21,500 to 26,015). Variable costs will remain at $24 per pair of shoes. Management is impressed with Wendy's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

Explanation / Answer

Total fixed cost = 241200+ 72144 = 313344 current price = 40.32 sales = 26015 variable cost = $24 New break even point = Fixed cost / contribution per unit contribution per nit = sales per unit -variablecost per unit = 40.32- 24 =$16.32 break even point = $313344 / 16.32 =19200 units of volume shoud be sale New margine of safty(in dollars) = Actual sales - Break even sales =(26015*40.32) - (19200*40.32) =1048925-774144 =$274780.80 old break even : old selling price = 42 old variable cost = 24 fixed cost = $241200 BEP = 241200 /(42-24) = $241200 / 18 = 13400 units.. old margin of safty in dollars =( 21500 *42 )- ( 13400*42) =903000-562800 =$340200 so the idea have changed the BReak even point from 13400 units to 19200 units and Margine of safty from $340200 to $274780 so the idea have changed the BReak even point from 13400 units to 19200 units and Margine of safty from $340200 to $274780

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