Question

CALCULATOR PRINTER VERSION BACK Problem 18-4A Mary 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 ighting system and increased display space that will add $49,200 in fixed costs to the $396,000 currently spent. In addition, Mary is proposing that a 5% price decrease (560 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. Your answer is partially correct. Try again. 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 o decimal places, e.g. 1,225.) Current break-even point T 18550 pairs of shoes New break-even point 2 1200 pairs of shoes LINK TO TEXT TO TEXT LINK TO TEXT

Answer 1

1) Current break-even point : Break-even point = Total Fixed Costs / Contribution margin per unit $396,000 / (560 - $36) 16,500 pairs of shoes = New break-even point : Break-even point = Total Fixed Costs / Contribution margin per unit ($396,000+ $49,200)/($57 - $36) 21,200 pairs of shoes 2) Current margin of safety ratio: Margin of safety ratio = (Actual Sales volume - Break-even point) / Actual sales volume = (20.000 - 16,500) / 20,000 18% New margin of safety ratio: Margin of safety ratio = (Actual Sales volume - Break-even point) / Actual sales volume (24,000 - 21,200)/24,000 12% 3) Bargain Shoe Store CVP Income Statement Current New Sales $1,200,000 $1,368,000 Variable Expenses -$720,000 -$864.000 Contribution margin $480.000 $504.000 Fixed Expenses -$396.000 -$445,200 Net Income (Loss) $84,000 $58,800