Problem 18-4A BARGAIN SHOE STORE CVP Income Statement Current New Warning Don\'t
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Problem 18-4A
BARGAIN SHOE STORE
CVP Income Statement
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Problem 18-4A
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 $27,660 in fixed costs to the $281,350 currently spent. In addition, Mary is proposing that a 5% price decrease ($40 to $38) will produce a 19% increase in sales volume (21,610 to 25,716). 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.(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.)
Current break-even point pairs of shoes New break-even point 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%.)
Current margin of safety ratio % New margin of safety ratio %
(c) Prepare a CVP income statement for current operations and after Mary’s changes are introduced.
BARGAIN SHOE STORE
CVP Income Statement
Current
New
Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses
$ $Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses
Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses
Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses
Administrative ExpensesContribution MarginCost of Goods SoldFixed ExpensesGross ProfitNet Income/(Loss)SalesSelling ExpensesVariable Expenses
$ $ Would you make the changes suggested?NoYes
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Copyright © 2000-2016 by John Wiley & Sons, Inc. or related companies. All rights reserved.Explanation / Answer
Current New SP per Unit 40 38 Variable Cost Per Unit 24 24 Contribution per Unit 16 14 No. Of Units Sold 21,610 25,716 Fixed Cost 281,350 309,010 Total sales 864,400 977,208 Answer a. BEP in Unit = Fixed Cost / Contribution per Unit Current BEP = $281350 / 16 = 17584.38 Units or 17584 Units (Approx) New BEP = $309,010 / $14 = 22072.14 Units or 22072 Units (Approx) Answer b. Margin of Safety = (Current Level sales - BES) / Current level Sales Current Margin of Safety = (8,64,400 - 703360)/8,64,400 = 18.63% New Marhin of Safety = (977208 - 838,736) / 977,208 = 14.17% Answer c. Bargain Shoe Store CVP Income Statement Current New Sales 864,400 977,208 Less: Variable Costs 518,640 617,184 Contribution 345,760 360,024 Less: Fixed Costs 281,350 309,010 Net Income / (Loss) 64,410 51,014 No, The changes should not be made. As it will decrease the net Income by $13,396