Question

Question 1 Pharoah 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 $14,000 in fixed costs to the $133,000 currently spent. In addition, Pharoah is proposing that a 5% price decrease ($20 to $19) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $12 per pair of shoes. Management is impressed with Pharoah'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 Pharoah's ideas are used. Current break-even point pairs of shoes New break-even point pairs of shoes Compute the margin of safety ratio for current operations and after Pharoah's changes are introduced. (Round answers to 0 decimal places, e.g. 15%.) Current margin of safety ratio New margin of safety ratio Prepare a CVP income statement for current operations and after Pharoah's changes are introduced. BARGAIN SHOE STORE CVP Income Statement Current New Would you make the changes suggested?

Answer 1

Current breakeven point in pairs of shoes is = Fixed cost/Contribution margin per pair shoe Fixed cost is = 5 133,000/- Contribution margin per pair of shoe = Selling price - variable cost = (20-12) = 5 8 Current breakeven point in pairs of shoes is = (133000/8) Current breakeven point in pairs of shoes is = 16,625 New breakven point in pairs of shoes is = New fixed cost/New contribution margin per pair of shoe New breakven point in pairs of shoes is = ((133000+14000)/((19-12) New breakven point in pairs of shoes is - 147000/7 New breakven point in pairs of shoes is = 21,000 Current margin of safety ratio % = (Margin of safety pairs of shoes/Total pair of shoes sales)*100 Margin of safety pair of shoes is = Total sales of pairs of shoes - Breakeven pairs of shoes = (20000-16625) Margin of safety pair of shoes is = 3,375 Current margin of safety ratio % = (3375/20000)*100 Current margin of safety ratio % = 16.875% New margin of safety ratio % - (New margin of safety pairs of shoes/Total sales of pairs of shoes)*100 New margin of safety pairs of shoes = (24000-21000) - 3,000 New margin of safety ratio % = (3000/24000)*100 New margin of safety ratio % = 12.50% CVP Income statement for Current and Proposed :- Particulars Current Sales 400,000 (20*20000) Less: Variable expenses 240,000 (12*20000) Contribution margin 160,000 Less: Fixed cost 133,000 Net Income 27,000 Proposed 456,000 (24000*19) 288,000 (24000*12) 168,000 147,000 21,000 Since there was a decline in Net Income due to new changes by $ 6,000/. No. we will not suggest for making changes.