Question

Problem 18-5A a-c (Part Level Submission) (Video) Blossom 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 $10,000 in fixed costs to the $144,000 currently spent. In addition, Blossom 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 Blossom's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. (a) (b) Compute the margin of safety ratio for current operations and after Blossom's changes are introduced. (Round answers to O decimal places, e.g. 15%.) Current margin of safety ratio New margin of safety ratio

Answer 1

Margin of Safety % = ( Actual sales - BEP Sales )/ Actual Sales

• Current Level :

Selling Price = 20, Variable cost = 12 , Contibution MArgin = 20-12 = $8, fixed Cost = 144,000

Break Even sale= Fixedcost / Contriution Margin = 144,000 /8 = 18,000

MArgin of safety = ( 20000-18000)/20,000 =2000/20,000

= 10% (Answer)

• New Level

Selling Price =19 , Varaibel cost = 12, contibution Margin = 19-12 = 7 Fixed cost = 154,000

Break Even Sales = 154000/7 = 22,000

MArgin of Safety = (24000-22000)/24,000 = 8.3% = 8% (Answer)