Barb Tsai is the advertising manager for Thrifty 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, Barb is proposing that a 5% price decrease (from $40 to $38) will produce an increase in sales volume from 20,000 to 24,000 units. Variable costs will remain at $24 per pair of shoes. Management is impressed with Barb's ideas but is concerned about the effects that these changes will have on the break- even point and the margin of safety.
Instructions
(a) Calculate the current break-even point in units, and compare it with the break-even point in units if Barb's ideas are used.
(b) Calculate the margin of safety ratio for current operations and after Barb's changes are introduced. (Round to nearest full percent.)
(c) Prepare a CVP income statement for current operations and after Barb's changes are introduced. Would you make the changes suggested?