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 $40,500 in fixed costs to the $270,000 currently spent. In addition, Julie is proposing that 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 Julie's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.
(a) Compute the current break-even point in units, and compare it to the break-even point in units if Julie'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
(b) Compute the margin of safety ratio for current operations and after Julie's changes are introduced. (Round answers to 0 decimal places, e.g. 15%.)
Current margin of safety percentage ___%
New margin of safety percentage ___%
(c) Prepare a CVP income statement for current operations and after Mary's changes are introduced.
BARGAIN SHOE STORE
CVP Income Statement
Current New
Sales $ ____ $____
Variable Expenses ____ ____
Contribution Margin ____ ____
Fixed Expenses ____ ____
Net Income / (Loss) ____ ____