Question

CALCULATOR FULL SCREEN PRINTER VERSION BACK NEXT Problem 11-4 (Part Level Submission) Mary Willis is the advertising manager for Ayayai Shoe Store. She is currently working on a major promotional campaign. Her ideas indude the installation of a new lighting system and increased display space that will add $19,000 in fixed costs to the $128,000 currently spent. In addition, Mary 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 Mary's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. (a)

please help me with C
thanks

Answer 1

Solution:

Solution a)

Calculation of Current Break Even point in unit

= Current Fixed Cost / Current Contribution per unit

= $128,000 / $8 = 16,000 pairs of shoes

Calculation of New Break Even point in unit

= New Fixed Cost / New Contribution per unit

= $147,000 / $7 = 21,000 pairs of shoes

Solution b)

Current Margin of Safety Ratio

= [Current Sales (Units) – Current Break Even Point Sales (Units)]

= (20,000 units – 16,000 units) / 20,000 units = 20%

New Margin of Safety Ratio = [New Sales (Units) – New Break Even Point Sales (Units)]

= (24,000 units – 21,000 units) / 24,000 units = 12.50%

Solution c) Preparation of CVP Income Statement for current operations and after Mary’s changes are introduced.

	Current		New
	Total $ (20,000 Units)	Per Unit $	Total $ (24,000 Units)	Per Unit $
Sales	4,00,000.00	20.00	4,56,000.00	19.00
Less: Variable Cost	2,40,000.00	12.00	2,88,000.00	12.00
Contribution	1,60,000.00	8.00	1,68,000.00	7.00
Less: Fixed Cost	1,28,000.00		1,47,000.00
Profit	32,000.00		21,000.00

Would you make the changes suggested?

It is not recommended to make the changes as it will reduce the profits of the company by $11,000 ($32,000 - $21,000).