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 lighiting system and increased display space that will add $24,000 in fixed costs to the $270,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at 24$ per pair of shoes. Management is impresssed with Mary's ideas but concerened about the effects that these changes will have on the break-even-point and the margin of safety.

Compute the current break-even-points in units, and compare it to the break-even-point in units if Mary's ideas are used

Answer 1

So the break even point is increased by 4,125 units

Step-by-step explanation:

The computation is shown below:

As we know that

Break even point in units is

= (Fixed expenses ) ÷ (Contribution margin per unit)

where,

Contribution margin per unit = Selling price per unit - Variable expense per unit

So the current break even point is

= $270,000 ÷ ($40 - $24)

= $270,000 ÷ $16

= 16,875 units

And, if mary ideas are used, so break even point is

= ($270,000 + $24,000) ÷ ($38 - $24)

= $294,000 ÷ $14

= 21,000 units

So the break even point is increased by 4,125 units by taking the difference