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Alice Ohta is the advertising manager for Value Shoe Store
Alice Ohta 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 $30,870 in fixed costs to the $264,600 currently spent. In addition, Alice is proposing that a 10% priCe decrease ($35 to $31.50) will produce a 20% Increase In sales volume (21,000 to 25,200). Variable costs will remain at $14 per pair of shoes. Management are Impressed with Alice's Ideas but are concerned about the effects that these changes will have on the break-even point and the margin of safety.
Calculate the current break-even point in units, and compare it with the break-even point In units If Alice's ideas are used. Current break-even point units Break-even point If Alice's ideas are used units
Calculate the margin of safety ratio for current operations and after Alice's changes are Introduced.
Current margin of safety ratio
Margin of safety ratio Alice's changes are Introduced
Prepare CVP income statements for current operations and after Alice's changes are introduced.
VALUE SHOE STORE CVP Income Statement
Expert Solution
Computation of current break-even point in units and the break-even point in units if Alice's ideas are used:
| Particulars | Current scenario | If Alice's ideas are used | |
| Sales price per unit (a) | $35.00 | $31.50 | |
| Variable cost per unit(b) | $14.00 | $14.00 | |
| Contribution per unit(c=a-b) | $21.00 | $17.50 | |
| Fixed costs (d) | $264,600.00 | $295,470.00 | = $264,600+$30,870 |
| Break even in units (e=d/c) | 12600 | 16884 |
If Alice's ideas are used, break even sales in units will increase from 12,600 units to 16884 units as contribution per unit will decrease and fixed costs will increase.
Computation of margin of safety ratio for current operations and after Alice's changes are introduced:
| Particulars | Current scenario | If Alice's ideas are used |
| Sales (in units) | 21,000 | 25,200.00 |
| Sales price per unit (in $) | $35 | $31.50 |
| Sales value (A) | $735,000 | 793,800.00 |
| Break even in units | 12,600 | 16,884 |
| Break even sales (B) | $441,000 | 531,846.00 |
| Margin of safety (C )=(A) - (B) | $294,000 | $261,954 |
| MOS Ratio (D) =(C )/ (A) | 40% | 33% |
So, It can be observed from the above calculation that margin of safety will decrease from 40% to 33% if Alice's changes are introduced.
| CVP Income Statement: | ||
| Particulars | Current scenario | If Alice's ideas are used |
| Sales | 735,000 | 793,800.00 |
| Less: Variable Costs | $294,000 | $352,800 |
| Contribution Margin | 441,000.00 | 441,000.00 |
| Less: Fixed Costs | 264,600 | 295,470 |
| Net Operating Income | 176,400.00 | 145,530.00 |
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