Cost Volume Profit

Course Assignment

The advertising manager for Jack Inc, a manufacturer of womens shoes, 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 $34,000 in fixed costs to the $270,000 currently spent by the company. In an effort to increase sales volume the advertising manager is also proposing a 5% price decrease from the current selling price of $40 per pair of shoes. The company is currently selling 20,000 pairs of shoes and expects that these changes would bring a 20% increase in the number of shoes sold. The current variable costs for a pair of shoes are $22 and management expects this figure to remain unchanged.

Management is impressed with the advertising managers initiative and ideas but is concerned about the effects these changes will have on company profits, break-even point and margin of safety.

Requirements

1. Using Microsoft Excel prepare a contribution margin income statement based on the companys current operations. The income statement should be properly formatted and include sales, variable costs and contribution margin in total and also on a per unit basis. Right below the income statement calculate the following based on the current operations:

Break even in units sold

Break even in dollars

Margin of safety in units

Margin of safety in dollars

2. Using Microsoft Excel prepare a contribution margin income statement based the advertising managers recommendations. The income statement should be properly formatted and include sales, variable costs and contribution margin in total and also on a per unit basis. Right below the income statement calculate the following based on the current operations:

Break even in units sold

Break even in dollars

Margin of safety in units

Margin of safety in dollars

3.Using Microsoft Word, prepare a one-page memo in which you explain whether or not these changes should be made. Please be very careful when you prepare this memo. Your grade will be based on the following:

a)Does the memo include a clear recommendation, properly supported by your analysis?

b)Does the memo exhibit a clear and coherent overall structure?

c)Does the memo employ correct grammar, sentence and paragraph structure?

d)Are there punctuation and spelling errors?