Mary Willis is the advertising manager for Bargain Shoe Store. She is currently
ID: 2417700 • Letter: M
Question
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 lighting system and increased display space that will add $25,450 in fixed costs to the $284,210 currently spent. In addition, Mary is proposing that a 5% price decrease ($45 to $43) will produce a 19% increase in sales volume (20,730 to 24,669). Variable costs will remain at $29 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) 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 0 decimal places, e.g. 1,225.)
_______ pairs of shoes
(b) Compute the margin of safety ratio for current operations and after Mary’s changes are introduced. (Round answers to 0 decimal places, e.g. 15%.)
(c) Prepare a CVP income statement for current operations and after Mary’s changes are introduced.
Current break-even point _______pairs of shoes New break-even point_______ pairs of shoes
Explanation / Answer
(a)
Current selling price per unit = $45
Current variable cost = $29
Current contribution margin per unit = Selling price – Variable costs = $45 -$29 = $16
Current fixed costs = $284,210
Break-even point in units = Fixed costs/Contribution margin per unit =$284,210/$16 =17,763 units
Proposed selling price per unit $43
Variable cost = $29
New contribution margin per unit = $43 - $29 = $14
Proposed fixed costs = $284,210 + $25,450 = $309,660
Break-even point in units = $309,660/$14 = 22,119 units
The break-even point in units increases from 17,763 to 22,119 units if Mary's ideas are used.
b)
Current operations:
Margin of safety = Actual/Budgeted sales - Break-even sales = (20,730 units x $45) - (17,763 units x $45)
Margin of safety = $932,850 - $799,335 = $133,515
Margin of safety ratio = Margin of safety (in dollars)/Actual sales =$133,515/$932,850 = 0.14
Proposed operations:
Margin of safety = Actual/Budgeted sales - Break-even sales = (24,669 units x $43) - (22,119 units x $43)
Margin of safety = $1,060,767 - $951,117 = $109,650
Margin of safety ratio = Margin of safety (in dollars)/Actual sales =$109,650/$1,060,767 = 0.10
c)
Bargain Shoe Store
CVP Income Statement
Current
Proposed
Sales
(20,730 * $45)
$9,32,850.00
(24,669 * $43)
$10,60,767.00
Variable costs
(20,730 * $29)
-$6,01,170.00
(24,669 * $29)
-$7,15,401.00
Contribution margin
$3,31,680.00
$3,45,366.00
Fixed costs
-$2,84,210.00
-$3,09,660.00
Net income
$47,470.00
$35,706.00
Bargain Shoe Store
CVP Income Statement
Current
Proposed
Sales
(20,730 * $45)
$9,32,850.00
(24,669 * $43)
$10,60,767.00
Variable costs
(20,730 * $29)
-$6,01,170.00
(24,669 * $29)
-$7,15,401.00
Contribution margin
$3,31,680.00
$3,45,366.00
Fixed costs
-$2,84,210.00
-$3,09,660.00
Net income
$47,470.00
$35,706.00