Question

Problem 18-4A 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 $49,200 in fixed costs to the $396,000 currently spent. In addition, Mary 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 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 o 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 TURTLINK TO TEXT decimal places, e.g. 159.) Compute the margin of safety ratio for current operations and after Mary's changes are introduced. (Round answers to Current margin of safety ratio New margin of safety ratio LINK TO TEXT LINK TO TEXT LINK TO TEXT

Answer 1

Break even-point:

Current break even point	18,550	pairs of shoes
New break even point	21,200	pairs of shoes

Calculations:

	Current	New
Current Fixed cost	$396,000	$396,000
Addition to fixed cost if ideas used	$49,200	$49,200
Total Fixed costs (i)	$445,200	$445,200
Selling price per pair of shoe	$60	$57
Variable cost per pair of shoe	($36)	($36)
Contribution margin per pair of shoe (ii)	$24	$21
Break-even point (i ÷ ii)	18,550	21,200

Margin of safety:

Current margin of safety ratio	7	%
New margin of safety ratio	7	%

Calculations:

Current:

Current sales [20,000 x $60]	$1,200,000
Less: Current break even sales [18,550 x $60]	($1,113,000)
Margin of safety	$87,000

Margin of safety ratio = [Margin of safety ÷ Current sales] x 100 = [87,000/1,200,000 x 100] = 7.25% or 7% rounded

New:

New sales [24,000 x $57]	$1,368,000
Less:New break even sales [21,200 x $60]	($1,272,000)
Margin of safety	$96,000

Margin of safety ratio = [96,000/1,368,000 x 100] = 7.01% or 7% rounded.

Income Statement:

BARGAIN SHOE STORE
CVP Income Statement
	Current	New
Sales	$1,200,000	$1,368,000
Variable cost	($720,000)	($864,000)
Contribution margin	$480,000	$504,000
Fixed costs	($445,200)	($445,200)
Net income	$34,800	$58,800

Yes, i would suggest the changes because net income more after change.