Question

Problem 5-5A a-c (Video)

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, Mary 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 remain at $24 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.

Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used.

Current break-even point pairs of shoes

New break-even point pairs of shoes

Compute the margin of safety ratio for current operations and after Mary’s changes are introduced. (Round answers to 0 decimal places, e.g. 15%.)

Current margin of safety ratio %

New margin of safety ratio %

Prepare a CVP income statement for current operations and after Mary’s changes are introduced.

BARGAIN SHOE STORE
CVP Income Statement

Current

New

Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses

$

$

Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses

Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses

Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses

Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses

$

$

Would you make the changes suggested?

Answer 1

Required information is as computed below:	Calculation of Break even point and MOS
Contribution Income Statement
	Current		New
Units	20,000	Per Unit	24,000	Per Unit
Sales	$800,000	40	$912,000	38
Variable Costs	$480,000	24	$576,000	24
Contribution Margin	$320,000	16	$336,000	14
Contribution Margin ratio = (Contribution Margin/Sales)	40%		37%
Fixed Costs	$270,000		$294,000
Break even point (Fixed Cost/Cont Margin ratio)	$675,000		$798,000
Break even point in units (Fixed Cost/Cont Margin per unit)	16,875		57,000
Margin of safety (Total sales minus break even sales)	$125,000	$6	$114,000	$4.75
Margin of safety percentage (MOS/ Actual sales)	15.63%		12.50%
Contribution Income Statement
Bargain Shoe Store	Current		New
Units	20,000	Per Unit	24,000	Per Unit
Sales	$800,000	40	$912,000	38
Variable Expenses	$480,000	24	$576,000	24
Contribution Margin	$320,000	16	$336,000	14
Contribution Margin ratio = (Contribution Margin/Sales)	40%		37%
Fixed Expenses	$270,000		$294,000
Net Income	$50,000		$42,000
No I will not make the suggested changes as these changes will not increase any profit.