Question

Case 1 – Cost-Volume-Profit Analysis (Assignment 1 – 20% of final grade) Janet Jennings is the general manager for Mercashoe 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 existing fixed costs. In addition, Janet is proposing a 5% price decrease ($40 to $38) that 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 Janet’s ideas but concerned about the effects theses changes will have on the break-even point and the margin of safety. Information provided: A. Rental expenses for the store: $5,000 per month. B. Janet has a salary assigned of $60,000 per year. C. The store has a sales manager who earns $45,000 per year. D. There are three salesclerks who have a salary assigned of $25,000 each per year. E. Social security expenses for each the employees represent 30% of their salary. F. Utilities expense: $600 per month. Instructions: 1. Compute the current break-even point in units and compare it to the break-even point in units if Janet’s ideas are implemented. 2. Compute the contribution margin ratio under current operations and after Janet’s changes are introduced. (Round to the nearest full percent). 3. Compute the margin of safety under the two proposals. 4. What is the operating income under each scenario? 5. Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Janet’s changes are introduced. 6. Prepare a Cost-Volume-Profit graph under the two scenarios. 7. Prepare a report explaining and justifying whether Janet’s changes should be adopted or not and provide suggestions supported by the information provided above. Show your work in Word of Excel

Answer 1

For Mercashoe store

Particulars	Present	Proposed cahnges	If Change Implemented
1.Number of units produced and sold	20000	20% increase	24000
2.Selling price per unit($)	40	5% decrease	38
3.Variable cost per unit ($)	24	-	24
4.Contribution per unit [2-3]($)	16		14
5.Total Fixed Cost($)
Rental Expenses [$5000*12m]	60000
Janet Salary	60000
Sales Manager Salary	45000
Sales Clerks salary[$25000*3p]	75000
Social Security expenses[30% (60000+45000+75000)]	54000
Utility expenses[$600*12m]	7200
Subtotal (5)	301200	24000 increase	325200
6.Total Contribution(4*1)	320000		336000
7.Total Profit (6-5)	18800	8000 decrease	10800
8.Contribution margin ratio (4/2)	40%		36.84%
9.BEP in units (5/4)	18825		23229
10.MOS sales in units (1-9)	1175		771

Based on the above calculations it clear that it is best for the Shoe store to continue its present case scenario and not make changes as suggested by Janet as it would reduce it's profit by $8000 and also inceases the BEP and reduces MOS due to decrease in contribution alongside increase in Fixed Cost, if the changes suggested are adopted.

The Shoe store could only benefit from the proposed change, save to the change of increase in Fixed cost, which is not possible in the given case as it was no whre mentioned that the proposed changes are flexible. So it is best not to adopt the proposed plan and stick to the present scenario.