Question

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 17,875 pairs of shoes 22,000 pairs of shoes New break-even point T
Mary Willis is the advertising manager for Ayayai 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 $22,000 in fixed costs to the $286,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $24 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.

Answer 1

Current Margin Safety ratio = (20,000 * $ 40 ) - (17,875 * $ 40 ) divided by (20,000 * $ 40)

$ 8,00,000 - $ 7,15,000 = $ 1,25,000 divided by $8,00,000

Current margin Safety ratio is 10.6%

New margin Safety ratio = (24,000 * $ 38 ) - (22,000 * $ 38 ) divided by (24000 * $ 38)

$ 9,12,000 - $ 8,36,000 = $ 76,000 divided by $ 9,12,000

New Margin Safety ratio is 8.33%

Thank you.