Alice Oritz is the advertising manager for Value 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 $21,600 in fixed costs to the $219,600 currently spent. In addition, Alice is proposing that a 10% price decrease ($30 to $27.00) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $12 per pair of shoes. Management are impressed with Alices ideas but are concerned about the effects that these changes will have on the break-even point and the margin of safety.

Calculate the current break-even point in units, and compare it with the break-even point in units if Alices ideas are used.

Current break-even point		units
Break-even point if Alices ideas are used		units

Calculate the margin of safety ratio for current operations and after Alices changes are introduced.

Current margin of safety ratio		%
Margin of safety ratio Alices changes are introduced		%

Prepare CVP income statements for current operations and after Alices changes are introduced.

VALUE SHOE STORE CVP Income Statement December 31, 2020For the Month Ended December 31, 2020For the Year Ended December 31, 2020
		Current		New
Contribution marginSalesOperating income before taxFixed costsVariable costs		$		$
LessAdd: SalesOperating income before taxVariable costsFixed costsContribution margin
Variable costsOperating income before taxFixed costsContribution marginSales
LessAdd: Contribution marginFixed costsVariable costsSalesOperating income before tax
Operating income before taxSalesVariable costsContribution marginFixed costs		$		$

Would you make the changes suggested?

The changes should notshould be made.