Debra 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 $54,600 in fixed costs to the $399,000 currently spent. In addition, Debra is proposing that a 5% price decrease ($60 to $57) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $36 per pair of shoes. Management is impressed with Debras ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

(a)

Prepare a CVP income statement for current operations and after Debras changes are introduced.

BARGAIN SHOE STORE CVP Income Statement
		Current		New
select an income statement item Gross ProfitNet Income/(Loss)Fixed ExpensesAdministrative ExpensesCost of Goods SoldSelling ExpensesContribution MarginSalesVariable Expenses		$enter a dollar amount		$enter a dollar amount
select an income statement item SalesContribution MarginSelling ExpensesAdministrative ExpensesVariable ExpensesFixed ExpensesCost of Goods SoldNet Income/(Loss)Gross Profit		enter a dollar amount		enter a dollar amount
select a summarizing line for the first part Administrative ExpensesGross ProfitCost of Goods SoldSelling ExpensesFixed ExpensesSalesContribution MarginVariable ExpensesNet Income/(Loss)		enter a total amount for the first part		enter a total amount for the first part
select an income statement item Variable ExpensesContribution MarginFixed ExpensesNet Income/(Loss)Cost of Goods SoldAdministrative ExpensesSelling ExpensesGross ProfitSales		enter a dollar amount		enter a dollar amount
select a closing name for this statement SalesVariable ExpensesNet Income/(Loss)Administrative ExpensesFixed ExpensesCost of Goods SoldGross ProfitContribution MarginSelling Expenses		$enter a total net income or loss amount		$enter a total net income or loss amount

Would you make the changes suggested?

select an option NoYes

(b)

Compute the current break-even point in sales units, and compare it to the break-even point in sales units if Debras ideas are implemented. (Round answers to 0 decimal places, e.g. 5,275.)

Current break-even point		enter a number of pairs of shoes	pairs of shoes
New break-even point		enter a number of pairs of shoes	pairs of shoes

(c)

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

Current margin of safety ratio		enter percentages	%
New margin of safety ratio		enter percentages	%