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 $12,600 in fixed costs to the $198,450 currently spent. In addition, Alice is proposing that a 10% price decrease ($25 to $22.50) will produce a 20% increase in sales volume (21,000 to 25,200). Variable costs will remain at $10 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.

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

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

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

CURRENT / ALICE'S CHANGES

Sales

Less: Variable Costs

=Contribution Margin

Less: Fix Cost

= Operating Income