Question

Mary Willis is the advertising manager for Concord 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 $34,200 in fixed costs to the $411,000 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.

Answer 1

Current break even units = $17,125

New break even point in units = $21,200

Step-by-step explanation:

The computation of current break-even point in units and comparison with break-even point in units is shown below:-

Current break even units = Fixed cost ÷ Contribution margin per unit

= $411,000 ÷ ($60 - $36)

= $411,000 ÷ $24

= $17,125

New break even point in units = Fixed cost ÷ Contribution margin per unit

= ($411,000 + $34,200) ÷ ($57 - $36)

= $445,200 ÷ $21

= $21,200