Scenario:
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 $24,000 in fixed costs to the $270,000 in fixed costs currently spent. In addition, Mary is proposing a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $24 per pair of shoes. Management is impressed with Mary’s ideas but concerned about the effects these changes will have on the break-even point and the margin of safety.
Complete the following:
Use and analyze the information below to prepare an informal memo to management addressing Mary’s suggested changes. Explain whether Mary’s changes should be adopted. Why or why not?
1. Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used.
2. Compute the margin of safety ratio for current operations and after Mary’s changes are introduced (Round to nearest full percent).
3. Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Mary’s changes are introduced.
