Question

Problem 18-4A 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 $57,600 in fixed costs to the $396,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($60 to $57) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $36 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.

Your answer is partially correct. Try again. Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used. (Round answers to 0 decimal places, e.g. 1,225.) Current break-even point 16500 pairs of shoes New break-even point 20000 pairs of shoes

Your answer is incorrect. Try again. 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 26 % New margin of safety ratio 23 %

Your answer is partially correct. Try again. Prepare a CVP income statement for current operations and after Mary’s changes are introduced. BARGAIN SHOE STORE CVP Income Statement Current New $ $ $ $ Would you make the changes suggested? No

Answer 1

1	Breakeven Point ( Units ) = Fixed Expenses / ( Selling price per unit - Variable Cost per unit )
	Current Break Even Point = $ 396,000 / ( $ 60 - $ 36 )
			= 16,500 Pairs of shoes
	New Break Even Point = ( $ 396,000 + $ 57,600 ) / ( $ 57 - $ 36 )
			= 21,600 Pairs of shoes
2	Margin of Safety ratio = ( Budgeted sales - Break even sales ) / Budgeted Sales
	Current Margin of Safety ratio = 18 %
	New Margin of Safety Ratio = 10 %
*		Current	New
	Budgeted Sales	12,00,000	13,68,000
	Break Even Sales	9,90,000	12,31,200
	Margin of Safety	2,10,000	1,36,800
	Margin of Safety Ratio	18	10
3	CVP Income Statement
		Current	New
	Sales	12,00,000	13,68,000
	Less : Variable Cost	7,20,000	8,64,000
	Contribution Margin	4,80,000	5,04,000
	Less : Fixed Cost	3,96,000	4,53,600
	Operating Income	84,000	50,400
	No, Changes should not be made.