Question

Mary Willis is the advertising manager for Grouper 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 $21,800 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 pairs of shoes New break-even point 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, e.g. 15%.) Current margin of safety ratio % New margin of safety ratio % LINK TO TEXT LINK TO TEXT LINK TO TEXT

Prepare a CVP income statement for current operations and after Mary’s changes are introduced. GROUPER 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

Answer 1

Answer:-

Current 20,000 New 24,000 1 Sales volume (no. of shoes) 2 3 4 Sales price per shoes Less: Variable cost per shoes Contrinution margin per shoes $ $ $ 20 12 8 $ $ $ 19 12 7 5 Total Fixed cost $ 128,000 $ 149,800 6 Break even point (no. of shoes) $ 16,000 $ 21,400 7 Actual sales (1) > (2) $ 400,000 $ 456,000 8 Break even sales (6) (2) $ 320,000 $ 406,600 9 Margin of safety (7) - (8) / (7) x 100 20% 11%

CVP INCOME STATEMENT Current New Sales $ 400,000 $ 456,000 Less: Variable cost 240,000 288,000 Contribution margin 160,000 168,000 Less: Fixed cost 128,000 149,800 Net income 32,000 18,200

Comment: There is a reduction of $13,800 (i.e. $32,000 - $18,200) in the Net Income if the changes suggested by Mary Willis is implemented.

Answer-No