Reference no: EM132438231

Problem: A 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 $24,000 in fi xed costs to the $270,000 currently spent. In addition, Mary 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 Mary's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

Instructions:

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

Question 2: Compute the margin of safety ratio for current operations and after Mary's changes are introduced. (Round to nearest full percent.)

Question 3: Prepare a CVP income statement for current operations and after Mary's changes are introduced. (Show column for total amounts only.) Would you make the changes suggested?