Mary Willis is the advertising manager for Bargain Shoe Store. She is currently
ID: 2540990 • 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 $24,600 in fixed costs to the $128,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($20 to $19) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $12 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.
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 New break-even point pairs of shoes pairs of shoes 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 ratioExplanation / Answer
Answer
Current
New
SP price unit
20
19
(-) Variable cost per unit
12
12
Contribution margin per unit
$8
$7
Working
Current
New
A
Fixed Costs
$128000
$152600
B
Contribution margin per unit
$8
$7
C=A/B
Break Even point (pair of shoes)
16000
21800
Working
Current
New
A
Sales (pair of shoes)
20000
24000
B
Break Even point (pair of shoes)
16000
21800
C=A-B
Margin of Safety units
4000
2200
D=C/A
Margin of Safety ratio
20%
9%
Current
New
Sales
$400000
$456000
(-) Variable cost
$240000
$288000
Contribution margin
$160000
$168000
(-) Fixed cost
$128000
$152600
Net Income
$32000
$15400
* No the change is NOT Suggested as the Net income in the 'New' Scenario is decreasing from $32000 to $15400
Current
New
SP price unit
20
19
(-) Variable cost per unit
12
12
Contribution margin per unit
$8
$7