The advertising manager for Bertolon Inc, a manufacturer of women’s’ shoes, is c
ID: 2578368 • Letter: T
Question
The advertising manager for Bertolon Inc, a manufacturer of women’s’ shoes, 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 $34,000 in fixed costs to the $270,000 currently spent by the company. In an effort to increase sales volume the advertising manager is also proposing a 5% price decrease from the current selling price of $40 per pair of shoes. The company is currently selling 20,000 pairs of shoes and expects that these changes would bring a 20% increase in the number of shoes sold. The current variable costs for a pair of shoes are $22 and management expects this figure to remain unchanged.
Management is impressed with the advertising manager’s initiative and ideas but is concerned about the effects these changes will have on company profits, break-even point and margin of safety.
Requirements
1. Using Microsoft Excel prepare a contribution margin income statement based on the company’s current operations. The income statement should be properly formatted and include sales, variable costs and contribution margin in total and also on a per unit basis. Right below the income statement calculate the following based on the current operations:
Break even in units sold
Break even in dollars
Margin of safety in units
Margin of safety in dollars
2. Using Microsoft Excel prepare a contribution margin income statement based the advertising managers recommendations. The income statement should be properly formatted and include sales, variable costs and contribution margin in total and also on a per unit basis. Right below the income statement calculate the following based on the current operations:
Break even in units sold
Break even in dollars
Margin of safety in units
Margin of safety in dollars
Explanation / Answer
Answer
Amount in $
Per Unit $
Units
Sales
800000
40
20000
Variable Cost
440000
22
20000
Contribution Margin
360000
18
20000
Fixed Cost
270000
Net Operating Income
90000
A
Fixed Cost
270000
B
Contribution per unit
18
C=A/B
Break Even in Units sold
15000
D
Sales price
40
E=C x D
Break Even point in Sales Dollars
600000
F [given]
Total Sales
800000
G= F -E
Margin of Safety Sales in dollars
200000
H
Sales Price
40
I=G/H
Margin of Safety in Units sold
5000
Amount in $
Per Unit $
Units
Sales
912000
38
24000
Variable Cost
528000
22
24000
Contribution Margin
384000
16
24000
Fixed Cost
304000
Net Operating Income
80000
A
Fixed Cost
304000
B
Contribution per unit
16
C=A/B
Break Even in Units sold
19000
D
Sales price
38
E=C x D
Break Even point in Sales Dollars
722000
F [given]
Total Sales
912000
G= F -E
Margin of Safety Sales in dollars
190000
H
Sales Price
38
I=G/H
Margin of Safety in Units sold
5000
Amount in $
Per Unit $
Units
Sales
800000
40
20000
Variable Cost
440000
22
20000
Contribution Margin
360000
18
20000
Fixed Cost
270000
Net Operating Income
90000
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