Question

Problem 5-5A a-c (Video) (Part Level Submission) Oriole 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 $34,200 in fixed costs to the $411,000 currently spent. In addition, Oriole 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 Oriole's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. (a) Compute the current break-even point in units, and compare it to the break-even point in units if Oriole's ideas are used. Current break-even point pairs of shoes New break-even point pairs of shoes Click if you would like to Show Work for this question: Open Show Work By accessing this Question Assistance, you will learn while you earn points based on the Point Potential Policy set by your instructor.

Answer 1

a) Break even unit = Fixed cost/Contribution margin per unit

Current break even unit = 411000/(60-36) = 17125 Units

New break even unit = 445200/(57-36) = 21200 Units

b) Variable cost per unit = Change in Cost/Change in machine hour = (6270-2700)/(810-300) = 7 per MH

Fixed cost = 6270-(810*7) = 600

Total cost on 460 machine hour = (460*7+600) = 3820

Amount differ = 3580-3820 = 240

Total Cost on 790 Machine hour = (790*7+600) = 6130

Amount differ = 6130-4880 = 1250