Mary Willis is the advertising manager for Bargain Shoe Store. She is currently
ID: 2540939 • 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 wil add $14,000 n Exed costs to the $133,000 currently spent. In addition, Mary s proposing that a 5% p ce decrese m teis mi produce a 20% increase in sales volume (20,000 to 24,000), variable costs will remain at S12 per par or shoes Management is mpressed with Mary's ideas but concerned about the effect that these changes will have on the break-even point and the margin of safety. 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 New break-even point pairs of shoes pairs of shoes LINK TO TEXT LINK TO TEXT LINK TO TEXT Compute the margin of safety ratio for current operations and after Mary's changes are introduced. (Round answers to 0 decimal places, eg. S%J Current margin of safety ratioD New margin of safety ratio Prepare a CVp income statement for current operations and after Mary's changes are introduced BARGAIN SHOE STORE CVP Ince e Statement Would you make the changes suggested? Law 10 TEXT LENK FO TEXI LINK FO TEXTExplanation / Answer
CM per unit (current) : Selling price - Variable cost = 20-12 = $ 8 per unit CM per unit(New): 19-12 = $ 7 per unit Break even in units: Fixed cost / CM per unit Current: $ 133,000 / 8 = 16625 units New: $ 147000 /7 = 21,000 units Margin of safety : Net Income / CM per unit Current: $ 27000 / 8 = 3375 units New: 21000 / 7 = 3,000 units Margin of safety in % of sales: Current: 3375/20000*100 = 16.88% New: 3000/24000*100 12.50% CVP INCOME STATEMENT CURRENT NEW Sales revenue 400000 456000 Less: variable cost 240000 288000 Conttribution margin 160000 168000 Less: Fixed cost 133000 147000 Net income 27000 21000