Question

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 $387,600 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 Maryâs ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

Q1) Compute the current break-even point in units, and compare it to the break-even point in units if Maryâs ideas are used. (Round answers to 0 decimal places, e.g. 1,225.)

Q2) Compute the margin of safety ratio for current operations and after Maryâs changes are introduced. (Round answers to 0 decimal places, e.g. 15%.))

Q3Prepare a CVP income statement for current operations and after Maryâs changes are introduced.

Answer 1

1. Current BEP is 16,150 units that increases to 21,200 units.

2. Current margin of safety is 19% that falls to 12%

Step-by-step explanation:

1. Current break-even point = Fixed cost / contribution margin

Fixed cost = $387600

Contribution margin = Sales price - variable cost

= 60 - 36 = $24

Current BEP = 387600 / 24 = 16,150 units

BEP if Maryas ideas are used:

Fixed cost = 57600 + 387600 = $445,200

Contribution margin = 57 - 36 = $21

BEP = 445200 / 21 = 21,200 units

BEP increases to 21,200 units from 16,150 units in case Maryas ideas are used.

2. Current Margin of safety Ratio = Actual sales - BEP / Actual sales

= 20,000 - 16,150 / 20,000

= 3850/20000

= 0.1925 or 19%

Margin if safety if Maryas ideas used = 24000 - 21200 / 24000

= 2800/24000

= 0.1167 or 12%

Margin of safety falls to 12% from 19% if Maryas ideas are used.

3. Current income statement

Sales (20,000 * 60) $1,200,000

less: Variable expense $720,000

(20,000*36)

Contribution margin $480,000

less Fixed expense $387,600

Net income $92,400

Income statement after Maryas ideas

Sales (24,000 * 57) $1,368,000

less: Variable expense $864,000

(24,000*36)

Contribution margin $504,000

less Fixed expense $445,200

Net income $58,800