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 $54,600 in fixed costs to the $399,000 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.

1. 2. Compute the margin of safety ratio for current operations and after Mary's changes are introuduced.(Round to the nearest full percent)

(a) 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

3. Prepare a CVP income statement for current operations and after Mary's changes are introuduced.(Show coloumn for total ammounts only) Would you make the chages suggested?

Answer 1

a) Break Even Point (in units) = Total Fixed Cost/Contribution Margin per unit

Calculation of Break Even point is shown as follows:- (Amounts in $)

	Current Situation	New Situation
A) Selling Price per unit	60	57
B) Variable Cost per unit	36	36
C) Contribution Margin per unit (A-B)	24	21
D) Fixed Cost	399,000	453,600 (399,000+54,600)
E) Break Even Point (in pairs of shoes) (D/C)	16,625 pairs	21,600 pairs

Therefore current break even point is 16,625 pairs of shoes and new break even point is 21,600 pairs of shoes.

b) Calculation of Margin of Safety Ratio

	Current Situation	New Situation
A) Actual Sales in units	20,000	24,000
B) Break Even Sales in units	16,625	21,600
C) Margin of Safety (in units) (A-B)	3,375	2,400
D) Margin of Safety Ratio (C/A*100)	16.875%	10%

c) CVP Income statement for both Situation is shown as follows:- (Amounts in $)

	Current Situation	New Situation
Sales	1,200,000 (20,000*$60)	1,368,000 (24,000*$57)
Less: Variable cost	720,000 (20,000*$36)	864,000 (24,000*$36)
Contribution Margin	480,000	504,000
Less: Fixed cost	399,000	453,600
Net Income	81,000	50,400