Mary willis is the advertising manager for Bargain Shoe Store. She is currenty w
ID: 2568600 • Letter: M
Question
Mary willis is the advertising manager for Bargain Shoe Store. She is currenty working on a major promotional campaign. Her ideas indlude the installation of a new lighting system and increased display space that will add $12,800 in fixed costs to the $137,000 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 il re main at $12 per pair of snoes Management is impressed with Mary's deas but concerned aoout the effects that these changes wil have on the break-even pcint and the margin ot safety Problem 18-4 o decimal plad 225.) point in ur pairs of shoes Current break-even pcint pairs of shoes New break-aven pcint duced. es, e.u. 15) Round answers to 0 decir al places, eg. 15%.) Compute the mar n ot safety ratio for current operations and arter Mary's changes are intro Current margin of safety ratio New margin of safety ratio 50 Prepare a CVP income statement for current operations and atter Mary's changes are introduced. DARGAIN SIHOE STORE CVP Income Statement Would you make the changes suggested? Open Show Work Click if you would like to Show Work for this question:Explanation / Answer
A. Break even point=fixed cost/contribution margin per unit
Current:
=$137,000/(20-12)
=17,125 pair of shoes
New:
=149,800/(19-12)
=21,400
B.
Margin of safety ratio=(actual sales-breakeven sales)/budgeted sales
Current={$400,000-(17125×$20)}/400,000
=14%
New:{$456,000-(21400×$19)}/456,000
=11%
C.
CVP income statement:
$400,000
(20000×$20)
$456,000
(24000×$19)
$240,000
(20000×12)
$288,000
(24000×12)
$149,800
(137,000+$12,800)
No, as the net income decrease with changes. So changes should not apply.
Current(20,000 units) new(24000 units) Sales$400,000
(20000×$20)
$456,000
(24000×$19)
Variable expenses$240,000
(20000×12)
$288,000
(24000×12)
Contribution margin $160,000 $168,000 Fixed expense $137,000$149,800
(137,000+$12,800)
Net income (loss) $23,000 $18,,200