Mary Willis is the advertising manager for Bargain Shoe Store. She is currently
ID: 2470231 • 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 $27,490 in fixed costs to the $279,360 currently spent. In addition, Mary is proposing that a 5% price decrease ($44 to $42) will produce a 20% increase in sales volume (20,680 to 24,816). Variable costs will remain at $28 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
a)Contribution per unit = Selling price – Variable cost
= 44 – 28 = 16
i)Current breakeven point = Fixed cost / Contribution per unit = 279,360/16 =17,460 units
New Contribution per unit = New selling price – New variable cost = 42 – 28 = 14
New fixed cost = $279,360 + $27,490 = $306,850
New breakeven point = New fixed cost / New contribution per unit
= 306,850/14 = 21,918 units
b) Contribution Margin % = Contribution per unit / selling price x 100
= 16/44 x 100 = 36.36 %
Existing Break even sales = Fixed cost / Contribution Margin %
= 279,360/36.36 % = 768,240
Margin of safety = Total sales – Breakeven sales = 20,680 x 44-(768,240)
=$909,920-768,240
=$141,680
Existing margin of safety % = Margin of safety /Total sales
= $ 141, 680/909,920 = 15.57 %
c) New Contribution Margin % = New Contribution per unit / new selling price x 100
=14/42 x 100 = 33.33 %
Breakeven point sale = New fixed cost /new contribution margin %
= 306850/33.33 = 920,550
New margin of safety = New total sales – New breakeven sales
= 24,816 x 42- $920,550
=$1,042,272-$920,550
=$121,722
New total sales = New sales volume x New sales price
= 24,816 x 42 = $ 1,042,272
Margin of safety % = New margin of safety /New total sales
=$121,722 /1,042,272 x100
=11.68%
CVP Income statement
Particulars Old New
Sales 909,920 1,042,272
(-) variable cost @28 579,040 694,848
Contribution Margin 330,880 347,424
(-) Fixed cost 279,360 306,850
Net operating Income 51,520 40,574