18-4A

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 $27,210in fixed costs to the $284,070currently spent. In addition, Mary is proposing that a 5% price decrease ($40to $38) will produce a18% increase in sales volume (21,100to24,898). Variable costs will remain at $24per pair of shoes. Management is impressed with Marys ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

(a) Compute the current break-even point in units, and compare it to the break-even point in units if Marys ideas are used. (Round answers to 0 decimal places, e.g. 1,225.)

Current break-even point		pairs of shoes
New break-even point		pairs of shoes

(b) Compute the margin of safety ratio for current operations and after Marys changes are introduced. (Round answers to 0 decimal places, e.g. 15%.)

Current margin of safety ratio		%
New margin of safety ratio		%

(c) Prepare a CVP income statement for current operations and after Marys changes are introduced.

BARGAIN SHOE STORE CVP Income Statement
Current	New

	$	$

$

$

Would you make the changes suggested?