Richie Chandra is the advertising manager for Skechers brand. 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 $24,000 in fixed costs to the $270,000 currently spent.

In addition, Richie is proposing that a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $24 per pair of shoes. Management is impressed with Richies ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

Instructions

a) Compute the current break-even point in units, and compare it to the break-even point in units if Richies ideas are used. (1 mark)

b) Compute the margin of safety ratio for current operations, and after Richies changes are introduced. (1 mark)

c) Prepare a CVP income statement for current operations and after Richies changes are introduced. Would you make the changes suggested? (3 marks)

1. Richie Chandra is the advertising manager for Skechers brand. 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 $24,000 in fixed costs to the $270,000 currently spent. In addition, Richie is proposing that a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $24 per pair of shoes. Management is impressed with Richie's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. Instructions a) Compute the current break-even point in units, and compare it to the break-even point in units if Richie's ideas are used. (1 mark) b) Compute the margin of safety ratio for current operations, and after Richie's changes are introduced. (1 mark) c) Prepare a CVP income statement for current operations and after Richie's changes are introduced. Would you make the changes suggested? (3 marks) END of the EXAM Answer Booklet: Scan and Past your answers below