Question

Charlotte Henry is the advertising manager for Bargain TV 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 $25,000 in fixed costs to the $250,000 in fixed costs currently spent. In addition, Charlotte is proposing a 5% price decrease ($50 to $47.5) will produce a 20% increase in sales volume (50,000 to 60,000) according to market research. Variable costs will remain at $25 per TV since there is no change to purchasing or manufacturing. Management is impressed with Charlotte's research but concerned about the effects these changes will have on the break-even point.

• Compute the current break-even point in units, and compare it to the break-even point in units if Charlotte's ideas are used.
• Prepare a Cost-Volume-Profit (CVP) analysis, including a proforma income statement for current operations and if Charlotte's changes are adopted.

Answer 1

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Bargain TV Store
Breakeven units	Present	Proposed	Note
Sell price	50.00	47.50	A
Variable costs	25.00	25.00	B
Contribution margin	25.00	22.50	C=A-B
Fixed costs	250,000.00	275,000.00	D
Breakeven units	10,000.00	12,222.22	E=C/D
CVP analysis & Proforma income statement	Present	Proposed	Note
Sell price	50.00	47.50	A
Variable costs	25.00	25.00	B
Contribution margin	25.00	22.50	C=A-B
Units produced	50,000.00	60,000.00	D
Total Contribution	1,250,000.00	1,350,000.00	E=C*D
Fixed costs	250,000.00	275,000.00	F
Net Income	1,000,000.00	1,075,000.00	G=E-F