QUESTION 5 P22.5A P22.5A (LO 3, 4, 5) 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 fixed 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. Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. Instructions a. Compute the current break-even point in units, and compare it to the break-even point in units if Mary's ideas are used. b. Compute the margin of safety ratio for current operations and after Mary's changes are introduced. (Round to nearest full percent.) Current margin of safety ratio 16% c. 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?
QUESTION 5 P22.5A P22.5A (LO 3, 4, 5) 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 fixed 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. Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment. Instructions a. Compute the current break-even point in units, and compare it to the break-even point in units if Mary's ideas are used. b. Compute the margin of safety ratio for current operations and after Mary's changes are introduced. (Round to nearest full percent.) Current margin of safety ratio 16% c. 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:QUESTION 5
P22.5A
P22.5A (LO 3, 4, 5) 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 fixed 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.
Compute break-even point and margin of safety ratio, and prepare a CVP income
statement before and after changes in business environment.
Instructions
a. Compute the current break-even point in units, and compare it to the break-even
point in units if Mary's ideas are used.
b. Compute the margin of safety ratio for current operations and after Mary's
changes are introduced. (Round to nearest full percent.)
Current margin of safety ratio 16%
c. 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?
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