Reference no: EM131808644

Question - Tom 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 $54,600 in fixed costs to the $399,000 currently spent. In addition, Tom 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 Tom's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

1) Compute the current break-even point in units, and compare it to the break-even point in units if Tom's ideas are used.

2) Compute the margin of safety ratio for current operations and after Tom's changes are introduced.

3) Current margin of safety ratio: New margin of safety ratio: Prepare a CVP income statement for current operations and after Tom's changes are introduced. Would you make the changes suggested?