P22.5 (LO 3, 4, 5), E 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 $29,000 in fixed costs to the $270,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($40 to $38) will produce a 25% increase in sales volume (20,000 to 25,000). Variable costs will remain at $25 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 a. 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? b. Compute the current break-even point in sales units, and compare it to the break-even point in sales units if Mary's ideas are implemented. c. Compute the margin of safety ratio for current operations and after Mary's changes are introduced. (Round to nearest full percent.) c. Current margin of safety ratio 10% Compute contribution margin, fixed costs, break-even point, sales for target net income, and margin of safety ratio.
P22.5 (LO 3, 4, 5), E 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 $29,000 in fixed costs to the $270,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($40 to $38) will produce a 25% increase in sales volume (20,000 to 25,000). Variable costs will remain at $25 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 a. 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? b. Compute the current break-even point in sales units, and compare it to the break-even point in sales units if Mary's ideas are implemented. c. Compute the margin of safety ratio for current operations and after Mary's changes are introduced. (Round to nearest full percent.) c. Current margin of safety ratio 10% Compute contribution margin, fixed costs, break-even point, sales for target net income, and margin of safety ratio.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:P22.5 (LO 3, 4, 5), E 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 $29,000 in fixed costs to the
$270,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($40 to
$38) will produce a 25% increase in sales volume (20,000 to 25,000). Variable costs will
remain at $25 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
a. 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?
b. Compute the current break-even point in sales units, and compare it to the break-even
point in sales units if Mary's ideas are implemented.
c. Compute the margin of safety ratio for current operations and after Mary's changes are
introduced. (Round to nearest full percent.)
c. Current margin of safety ratio 10%
Compute contribution margin, fixed costs, break-even point, sales for target net income,
and margin of safety ratio.
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