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Mary 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 $28,210 in fixed costs to the $276,080 currently spent. In addition, Mary is proposing that a 5% price decrease ($42 to $40) will produce a 19% increase in sales volume (20,020 to 23,824). Variable costs will remain at $26 per pair of shoes. Management is impressed with Mary’s ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.
a) Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used.
Current break-even point pairs of shoes New break-even point pairs of shoes
b) Compute the margin of safety ratio for current operations and after Mary’s changes are introduced.
Current margin of safety ratio % New margin of safety ratio %
Prepare a CVP income statement for current operations and after Mary’s changes are introduced.
BARGAIN SHOE STORE CVP Income Statement Current New
________________ $ $
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__________________ $ $
$ $
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