P11-4 Mary Willis is the advertising manager for Bargain Shoe Store. She is curr
ID: 2516576 • Letter: P
Question
P11-4 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 $24,000 in fixed costs to the $270,000 currently spent. In addition, May is proposing that a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will re- main at $24 per pair of shoes. Management is impressed with Mary's ideas but concerned about the efects that these changes will have on the break-even point and the margin of safety Instructions (a) Compute the current break-even point in units, and compare it to the break-even lb) Compute the margin of safety ratio for current operations and after Mary's changes (c) Prepare a CVP income statement for current operations and after Mary's changes point in units if Mary's ideas are used. are introduced. (Round to nearest full percent.) are introduced. (Show column for total amounts only.) Would you make the changes suggested?Explanation / Answer
(a) Calculation of BEP
(b) Calculation of margin of safety ratio
(c)
No due to changes company will earn 42000 instead of previously earned 50000
Current Proposed Sales Price 40 38 Variable Cost 24 24 Contribution per unit (a) 16 14 Fixed Cost (b) 270000 294000 (270000+24000) BEP = (b/c) 16875 21000Related Questions
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