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Alma Ortiz is the advertising manager for CostLess Shoe Store.She is currently working on a major promotional campaign. Her ideasinclude the installation of a new lighting system and increaseddisplay space that will add $18,000 in fi xed costs to the $216,000currently spent. In addition, Alma is proposing that a 10% pricedecrease (from $30 to $27) will produce an increase in sales volumefrom 20,000 to 24,000 units. Variable costs will remain at $12 perpair of shoes. Management is impressed with Alma’s ideas butconcerned about the effects that these changes will have on thebreak-even point and the margin of safety. Instructions

(a) Compute the current break-even point in units, and compareit to the break-even point in units if Alma’s ideas are used.

(b) Compute the margin of safety ratio for current operationsand after Alma’s changes are introduced. (Round to nearest fullpercent.)

(c) Prepare a CVP income statement for current operations andafter Alma’s changes are introduced. (Show column for total amountsonly.) Would you make the changes suggested?

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Deanna Hettinger
Deanna HettingerLv2
28 Sep 2019

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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. Current Break even point: New Break even point: 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 ? Yes or No

The advertising manager for Bertolon Inc, a manufacturer of women’s’ shoes, 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 $34,000 in fixed costs to the $270,000 currently spent by the company. In an effort to increase sales volume the advertising manager is also proposing a 5% price decrease from the current selling price of $40 per pair of shoes. The company is currently selling 20,000 pairs of shoes and expects that these changes would bring a 20% increase in the number of shoes sold. The current variable costs for a pair of shoes are $22 and management expects this figure to remain unchanged.

Management is impressed with the advertising manager’s initiative and ideas but is concerned about the effects these changes will have on company profits, break-even point and margin of safety.

Requirements

1. Using Microsoft Excel prepare a contribution margin income statement based on the company’s current operations. The income statement should be properly formatted and include sales, variable costs and contribution margin in total and also on a per unit basis. Right below the income statement calculate the following based on the current operations:

Break even in units sold

Break even in dollars

Margin of safety in units

Margin of safety in dollars

2. Using Microsoft Excel prepare a contribution margin income statement based the advertising managers recommendations. The income statement should be properly formatted and include sales, variable costs and contribution margin in total and also on a per unit basis. Right below the income statement calculate the following based on the current operations:

Break even in units sold

Break even in dollars

Margin of safety in units

Margin of safety in dollars

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