Answered Essay: Mary Willis is the advertising manager for Bargain Shoe Store. She is currently working on a major promotional cam

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 $57,600 in fixed costs to the $387,600 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 0 decimal places, e.g. 1,225.)

Current break-even point pairs of shoes
New break-even point pairs of shoes

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

Expert Answer

 

Break even Point = Fixed Costs / ( Sale price – Variable cost)

Current BEP = 387600 / ( 60 – 36) = 16150

New BEP = 445200 / ( 57-36) = 21200

Particulars Before changes After changes
Sales 1200000 1368000
Less: Variable costs 720000 864000
Contribution 480000 504000
Less: Fixed costs 387600 445200
Net profit 92400 58800
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