Question

Oriole 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 $39,000 in fixed costs to the $423,000 currently spent. In addition, Oriole is proposing that a 5% price decrease ($60 to $57) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $36 per pair of shoes. Management is impressed with Oriole's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. (a) * Your answer is incorrect. Compute the current break-even point in units, and compare it to the break-even point in units if Oriole's ideas are used. Current break-even point 16,500 pairs of shoes New break-even point 21,600 pairs of shoes

Answer 1

Current selling price per unit $60 Current Variable cost per unit $36 Contribution per unit 60-36 $24 Total fixed expense current $423,000 Break even units fixed cost/contribution per unit 423,000/24 17625 units Current break even point

New selling price per unit Variable cost per unit Contribution per unit $57 $36 57-36 $21 39,000+423,000 $462,000 New fixed expenses Break even units fixed cost/contribution per unit 462000/21 22000 units New break even point

Current break even units Current sales Margin of safety 17625 units 20000 units Current sales-break even sales 20000-17625 2375 units Margin of safety= Margin of safety ratio (Margin of safety/sales) *100 (2375/20000)*100 12%

New break even units New sales Margin of safety 22000 units 24000 units Current sales-break even sales 24000-22000 2000 units Margin of safety= Margin of safety ratio= (Margin of safety/sales) *100 (2000/24000) *100 8%

CVP Income Statement Current Total 1,200,000 -720,000 Sales(20,000*60) Less:Variable expenses (20000*36) Contribution margin 480,000 Less: Fixed expenses Net Income -423,000 57,000

CVP Income Statement New Total 1,368,000 -864,000 Sales(24,000*57) Less:Variable expenses (24000*36) Contribution margin 504,000 Less: Fixed expenses Net Income -462,000 42,000

New changes will lead to decrease in overall net income therefore, it is not advisable to make the changes as suggested by Oriole