Question

Problem 19-4A 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. 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 pairs of shoes New break-even point pairs of shoes LINK TO TEXT LINK TO TEXT LINK TO TEXT 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 % LINK TO TEXT LINK TO TEXT LINK TO TEXT 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?

Answer 1

Part A

Current break-even point	16500 units
New break-even point	21600 units

Breakeven point = fixed expenses / contribution margin per unit

Contribution margin per unit = price per unit – variable cost per unit

Current break-even point = 396000/(60-36) = 16500 units

New break-even point = (396000+57600)/(57-36) = 21600 units

Part B

Current margin of safety ratio	18%
New margin of safety ratio	10%

Margin of safety ratio = (actual sales – breakeven sales)/actual sales

Current margin of safety ratio = ((20000*60)-(16500*60))/(20000*60) = 18%

New margin of safety ratio = ((24000*57)-(21600*57))/(24000*57) = 10%

Part C

Bargain Shoe Store CPV income statement
	Current	New
Sales	1200000	1368000
Variable expenses	720000	864000
Contribution margin	480000	504000
Fixed expenses	396000	453600
Net Income/(Loss)	$84000	$50600

(20000*60) = 1200000

20000*36 = 720000

24000*57 = 1368000

24000*36= 864000

Would you make the changes suggested?

No

The new proposal would decrease the profit.