Q8:Mary Willis is the advertising manager for Bargain Shoe Store. She is current
ID: 2447014 • Letter: Q
Question
Q8:Mary Willis 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 $23,600 in fixed costs to the $129,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($20 to $19) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $12 per pair of shoes. Management is impressed with Mary’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 Mary’s ideas are used.
b.)Compute the margin of safety ratio for current operations and after Mary's changes are introduced.
c.)Prepare a CVP income statement for current operations and after Mary's changes are introduced.
Explanation / Answer
a) Current Break even Break even point point with Mary;s idea Sale price (A) 20 19 Variable Cost (B) 12 12 Contribution Margin ( A - B) 8 7 Fixed Cost 129000 152600 Break even point in units = Fixed Cost / Contribution Margin BEP in units 129000/8 152600/7 16125 21800 BEP in value = BEP in units * Sale price BEP in value 16125 * 20 21800 * 19 322500 414200 b) Margin of Safety = ( Budgeted Sales - Break even point sales) / Budgeted sales Current Break even Break even point point with Mary;s idea Break even point sales ( units) 16125 21800 Budgeted Sales ( in units) 20000 24000 Margin of safety = (20000 -16125)/20000 *100 (24000 - 21800 )/24000*100 = 19.38% 9.17% c) Income Statement Current Situation After Mary's idea Sales unit 20000 24000 Sale Price 20 19 Revenue = Sales unit * Price (A) 400000 456000 Variable Cost = Number of units * Cost ( 12) (B) 240000 288000 Contribution (C) ( A - B) 160000 168000 Fixed Cost ( D) 129000 152600 Net Profit ( C - D) 31000 15400
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