Problem 19-4A Mary Willis is the advertising manager for Bargain Shoe Store. She
ID: 2460406 • Letter: P
Question
Problem 19-4A
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 lighting system and increased display space that will add $24,420 in fixed costs to the $284,430 currently spent. In addition, Mary is proposing that a 5% price decrease ($42 to $40) will produce a 19% increase in sales volume (22,060 to 26,251). Variable costs will remain at $26 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.)
(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.
BARGAIN SHOE STORE
CVP Income Statement
Current
New
Current break-even point pairs of shoes New break-even point pairs of shoesExplanation / Answer
Solution:
(a) Calculation of Current and New Break Even Point in Units
Break Even Point is the point at which all operating fixed cost are recovered. BE Point is the level of sales at which no profit no loss situation is occurred.
Break Even Point (in Units) = Total Fixed Cost / Contribution Margin Per Unit
Current Fixed Cost = $284,430
New Fixed Cost = $284,430 + $24,420 = $308,850
Contribution Margin Per Unit = Sales Price Per Unit – Variable Cost Per Unit
Current Contribution Margin Per Unit = $42 - $26 = $16
New Contribution Margin Per Unit = $40 - $26 = $14
Current Break Even Point (in units) = $284,430 / $16 = 17,776.875 Units or 17,777 Units
New Break Even Point (in Units) = $308,850 / $14 = 22,060.71 Units or 22,061 Units
(b) Calculation of Current and New Margin of Safety Ratio
Margin of Safety Ratio = Margin of Safety in dollars / Sale Value x 100
Calculation of Margin of Safety in dollars
Particulars
Current
New
Sales Value
$926,520
$1,050,040
Break Even Sales in unit
17,777
22,061
Sale Price Per Unit
$42
$40
Break Even Sales in dollars (Break Even unit x Sale price per unit)
$746,634
$882,440
Margin of Safety (Sale Value - Break Even Sales)
$179,886
$167,600
Current Margin of Safety Ratio = $179,886 / $926,520 x 100 = 19.415% or 19%
New Margin of Safety Ratio = $167,600 / $1,050,040 x 100 = 15.96% or 16%
(C) CVP Income Statement Current & New
Particulars
Current
New
Sales Units
22,060
26,251
Sale Price Per Unit
$42
$40
Sales Value
$926,520
$1,050,040
Less: Variable Cost ($26 per pair)
($573,560)
($682,526)
Contribution (Sales - Variable Cost)
$352,960
$367,514
Less: Fixed Cost
($284,430)
($308,850)
Profit
$68,530
$58,664
Particulars
Current
New
Sales Value
$926,520
$1,050,040
Break Even Sales in unit
17,777
22,061
Sale Price Per Unit
$42
$40
Break Even Sales in dollars (Break Even unit x Sale price per unit)
$746,634
$882,440
Margin of Safety (Sale Value - Break Even Sales)
$179,886
$167,600