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

Current situation

Selling price per unit = $60

Variable cost per unit = $36

Fixed cost = $411,000

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 60-36

= $24

Current break even point = Fixed cost/ Contribution margin per unit

= 411,000/24

= 17,125 pairs of shoes

Proposed situation

Selling price per unit = $57

Variable cost per unit = $36

Fixed cost = 411,000+34,200

= $445,200

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 57-36

= $21

New break even point = Fixed cost/ Contribution margin per unit

= 445,200/21

= 21,200 pairs of shoes

Current break- even point	17,125	pairs of shoes
New break- even point	21,200	pairs of shoes

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